Riding Global Growth

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TIME: Are you avoiding even the big techs, like Microsoft and Intel?

LYON: We're underweight.

TIME: The few techs you do own?

LYON: The most interesting is Royal Philips Electronics. It has a major exposure to the semiconductor business and owns 50% of one of the largest LCD manufacturers. The flat-panel business is just exploding.

TIME: The Madrid bombing triggered the market's first 5% pullback in a year. Will investors ever get over these events?

MUHLENKAMP: Yes. We have learned that the economy won't shut down.

BYRNE: Shocks create value in certain areas. But to say they wouldn't create an incredible flight to quality is a mistake. This gets in the psyche of folks and causes them to be more cautious, along the lines of people's behavior in the 1930s.

LYON: It's just another reason that we are value investors. Every time you buy a junky little stock or a pristine one with a 40 [price-earnings ratio] and something goes bad, the trapdoor is infinitely larger.

TIME: Let's give Susan a chance.

BYRNE: After all we've gone through, why wouldn't you want a dividend? The check clears; you get the money. Everything else about the market is a judgment. Longer term, companies that pay dividends will be where you want to be. For dividends to go up a lot, you want to watch where the cash is. Congress is trying to pass a law that lets companies bring money back from overseas without paying tax on it. That would repatriate a lot of dollars available for dividends.

TIME: Rising rates would be awful for what has been a pillar of the economy: housing, which Ron loves.

MUHLENKAMP: We know some people who regret buying tech stocks. We don't know anybody who regrets putting money in their home. If mortgage rates got to 7%, it would make a dent. But rates now are at 5.5% or so, and long-term studies show that this is a normal mortgage rate. We don't expect housing starts to keep growing. But the publicly traded builders are taking market share from the neighborhood man with a hammer. That has become their edge, and these are companies that sell for nine times earnings.

TIME: What stocks do you like that take advantage of all the remodeling?

MUHLENKAMP: We own American Woodmark. It makes replacement kitchens sold through Home Depot and Lowe's. We own Whirlpool. It has washing machines priced three times what a standard washing machine is, and they are selling fast. There's a big difference in margins at the top end. This past recession Harley-Davidson sales didn't fall off, and Winnebago came through in great shape. We own both of those stocks.

TIME: You also like homebuilders.

MUHLENKAMP: Just about all of them: Centex, Meritage, NVR, Lennar. If I had to pick today, it would be Centex and Meritage. In the past 10 years, market share of the 10 largest builders has gone from 10% to 20%. I don't see anything to keep it from going to 40%, which means they have another decade to run.

TIME: Anything else?

MUHLENKAMP: Natural gas. We own Patterson-UTI Energy and Nabors, which own drilling rigs. We are using more gas than we are drilling. We know where to find gas. It's just a matter of drilling it.

TIME: Liz? Tell us what you like.

BRAMWELL: We like the natural-gas drillers too. We also think that as the global economy improves we want to be in global financial companies that have close relationships with clients. We own Citigroup and J.P. Morgan Chase. We also like Goldman, Sachs for investment banking and AIG in the insurance area. We think two growth areas are orthopedic-device companies and restaurants. We're going to end up with amazing things like artificial cartilage. In the meantime we are getting minimally invasive hip replacement. Companies in this area are Stryker and Zimmer. Casual dining includes companies like Applebee's and Cheesecake Factory, which benefit from families not sitting down together at home anymore but going out to do that.

TIME: Your turn, Rob.

LYON: We expect advertising to pick up and benefit Gannett and Clear Channel. They have very little capital spending and don't have to worry about Indian and Chinese competition. The second thing we like is everything geared to investment banking and brokerage. We are in the early stage of an up cycle, and business is taking off. We own Citigroup, Goldman, Sachs and Morgan Stanley. The other major theme we have is to own the companies that supply emerging markets, and that means both energy and agriculture. British Petroleum has a 4% yield. It has a big interest in a major oil company in Russia that is well positioned to supply China directly. The play in U.S. agriculture is in the early stage. The classic big-cap player is Deere. As a result of drought and stronger demand, carry-overs of corn and soybeans are at record lows and prices are up. Farm machinery is old. So we think Deere has an excellent shot at a multiyear run.