Investing Insights from Morningstar

Some bargain hunters are cutting back on energy, looking to financials and healthcare.

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Each summer, hundreds of investing gurus and financial advisers come together in Chicago for a powwow known as the Morningstar Investing Conference. Here, they discuss hot topics in the investing world, have round-table chats on stocks, and plot strategies for the rest of the year. Thursday's agenda featured sessions on bargain-hunting, bonds, exchange-traded funds, and the psychology of investing. Here are a few highlights from top stock-pickers:

During the morning stock-pickers panel, Charles Pohl, chief investment officer of Dodge & Cox, said: "It's a really interesting time to be an investor in financials, especially if you have the ability to do a lot of due diligence and basic research.... Some of these companies are excellent franchises, and they're selling at very low valuations, so they represent really outstanding opportunities right now. Now there are real problems out there, particularly in the residential real estate market, the home builders, etc., and there'll be more losses; we're not through it yet, and trying to identify who the long-term winners are, where the long-term values are, is potentially a really profitable activity right now."

Pohl says Dodge & Cox has lightened up on energy: "That's a reflection of the fact that the stocks there—and also in the natural resources area...are beginning to justify the valuation of very, very high commodity prices being sustained long in the future, and we think that's going to be a difficult proposition. In energy, we think you're starting to see significant demand destruction. We've seen this month China and India—both of which have subsidized fuel prices—reduce those subsidies substantially, so it's going to get more expensive for consumers there. In the U.S., ...people are starting to cut back on consumption, and once they start to do that—buy more fuel-efficient cars and the like—those cutbacks might end up getting embedded in their behaviors and permanently destroy a certain amount of demand."

In response to a question about industries to avoid, Bob Torray of the Torray Fund said he's leery of infrastructure, steel, and agriculture stocks on account of their close ties to China and India and their dramatic rise in price: "If something goes wrong, these things will drop like a rock.... They're extremely volatile, and, I believe, dominated by momentum players."

During a session on bargain hunting, value maven Bruce Berkowitz of the Fairholme Fund says he's beginning to transition from energy to "a place no one wants to go:" healthcare. "It's amazing...you have companies that 10 years ago...were selling between 40 and 50 times earnings...and now you have pharmaceutical companies, for example, that are under 10 times earnings, that have world-class operations, great balance sheets....and no one wants to touch them." Berkowitz says he's particularly interested in HMOs. "You pay a very low price for companies that are disliked. There's a huge margin of safety building in the healthcare area right now."

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