HOW TO PLAY IT: US investors urged to stay at home, buy American

NEW YORK, July 11 Thu Jul 11, 2013 12:59am EDT

NEW YORK, July 11 (Reuters) - Stock market investors who embraced a "buy America" strategy have been well rewarded this year - particularly if they have targeted U.S. companies with a vast majority of their sales at home.

Rising U.S. home prices, the boom in U.S. oil and gas production, and a better jobs picture, have all made the outlook for the U.S. economy look rosier than many other places, particularly in comparison with weakness in Europe, China and other major emerging markets. Even political gridlock in Washington has been less of a threat as the fiscal picture has improved.

It all means that many companies selling mainly to U.S. consumers and businesses look like good bets for further gains, fund managers said.

But American defensive sectors such as utilities and telecommunications providers - which led the rally in the first half of the year - may not be as attractive as interest rates rise. Consumer discretionary companies and financials could profit the most, as they may get an earnings boost from any pickup in economic growth.

"It's not that the U.S. is in some great economic push, but it's more that we're the least ugly option out there," said David James, a portfolio manager of the $2.3 billion James Balanced Golden Rainbow fund. James, who runs an all-world fund, has been increasing his stake in U.S.-focused companies throughout this year, he said.

Here are ways stock investors can "Buy American":

MOMENTUM SHIFT

The kinds of companies expected to be winners in the second half of the year are not the same ones that have propelled the indexes so far in 2013.

Defensive stocks are up 17 percent year to date, while cyclicals - companies such as homebuilders and high-end retailers that are very reliant on economic growth - are up 12 percent, according to Goldman Sachs research. But these defensive dividend-payers, mostly utilities and telecom stocks, may suffer later as high interest rates raise their borrowing costs and provide competition for income investors, Goldman noted.

Goldman's top picks among large-caps include domestic names such as insurer Allstate, which Goldman analysts expect to jump by 24 percent over the next 12 months as its earnings increase, and hotel operator Wyndham Worldwide Corp., which Goldman says has a 38 percent stock price upside as it revamps its timeshare business and increases stock buybacks. Overall, Goldman expects the S&P 500 to gain another 8 percent by the end of the year.

Chris Brown, the chief investment officer at Boston-based Pax World Funds responsible for $2.8 billion in assets, has been selling international companies like mining giant Rio Tinto and buying U.S.-based asset management companies like BlackRock and automakers like Ford Motor Co.

Ford, which is the No. 2 U.S. automaker after General Motors and draws the bulk of its earnings from the United States, saw its North American sales rise 11 percent in the first quarter, compared with a 6 percent gain for the overall industry. U.S. car sales have rebounded, but Brown also likes Ford as an alternative way to play the U.S. housing recovery because of its highly profitable truck business.

"More construction means more pickup trucks, and the number-one-selling full-size truck is the Ford F-150," Brown said.

Michael Sansoterra, a portfolio manager of the $260 million RidgeWorth Large Cap Growth fund, recently opted to add shares of apparel brand Under Armour to his fund rather than Nike.

"We could have bought Nike, but we wanted a pure U.S. play. It's not that Nike's bad, but Under Armour doesn't have that international exposure," he said.

Under Armour generates about 95 percent of its sales domestically, Sansoterra said, compared with a 40 percent domestic focus for Nike.

Sansoterra has also been adding to his position in Fortune Brands Home & Security even though the stock is up nearly 35 percent this year. The rebound in housing will lead to both new construction and an uptick in home renovation, he said, giving the company the potential to double its earnings in the next two to three years. The United States accounts for 83 percent of Fortune's revenue, followed by Canada at 11 percent, according to Thomson Reuters data.

SMALLER AND CLOSER TO HOME

Small and mid-cap companies tend to be more domestically focused and have attractive valuations (and better growth prospects) than larger companies - though they are more volatile and could fall faster if the U.S. economy were to slow.

Despite a 19.9 percent gain in the benchmark Russell 2000 index for the year to date, small and mid-cap companies trade at an average price-to-book ratio of 1.9, according to StarMine, while the S&P 500 - itself up 15.9 percent for the year - trades at a pricier ratio of 2.3.

There is good value in mid-cap financials like Raymond James Financial, said Dan Veru, chief investment officer at Fort Lee, New Jersey-based Palisade Capital Management, responsible for $4.2 billion in assets. The company, which makes 90 percent of its revenue from the United States, is up 15 percent in 2013, and Veru expects more gains as the improving economy boosts its wealth management revenue.

Karl Brewer, portfolio manager of the $504 million William Blair Small Cap Growth fund, is focused on companies that will benefit from domestic consumer spending. He has been adding to his position in regional theme park operator Six Flags Entertainment Corp, which has gained 20 percent so far this year.

The company has reduced discounts and revamped its staffing and dining operations at a time when theme parks are expected to reach record revenues, he said. "These parks are an affordable, local option for families during the summer," Brewer said.

And, of course, close to home.

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