Finding value in America - three stocks to prosper

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Rick Bernstein, manager, US Equity Value Fubnd, Brown Advisory.

In the short-term, stockmarkets tend to be driven by emotion. That's likely to be the case for some time to come. Our value-based approach seeks out companies that are fundamentally strong, but currently out of favour and hence cheap. We look for solid, global, innovative companies, whose businesses and current valuations ought to allow them to navigate tricky markets better than most other companies.

We believe that investors' fears are more than priced into the valuations of these companies. Indeed, any significant positive change, such as progress on the US fiscal cliff, or evidence of a more business-friendly climate come November, could provide the catalyst for very attractive returns. Here are three stocks that we expect to prosper.

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NetApp (Nasdaq: NTAP) is an innovative leader in enterprise storage and data management, consistently gaining market share from its core strengths technology, partnerships and competitive new products. The stock is currently depressed due to weaker IT spending trends, primarily originating from cutbacks within Europe's public and financial services sectors, longer sales cycles and competition fears.

But despite these problems, the stock's very depressed valuation ignores many attractive attributes, including a strong and experienced management team, healthy financials, high free cash flow and above industry-average levels of growth.

Despite global growth concerns, high-quality global luxury brands are set to be the beneficiaries of increasing wealth within the emerging markets. For this reason, in the second quarter of this year, we added Tiffany (NYSE: TIF) to the portfolio. It seemed particularly attractive mainly because its price appeared to reflect a worst-case scenario. Yet it has great potential to grow worldwide this year new units are up 10%, more than half of which were in Europe, the Middle East and Asia.

In addition, it has a first-rate management team, with chief executive Michael Kowalski and chief operating officer James Fernandez having been with the company since 1983. Both are completely entrenched in the brand identity and culture and focused on growing the core Tiffany brand.

Our last tip is Paccar (Nasdaq: PCAR), whose heavy-duty trucks are marketed around the world under the Kenworth, Peterbilt and DAF nameplates. This global leader, which designs, manufactures and provides customer support for premium commercial vehicles, is a high-quality company with very impressive returns on capital.

The majority of Paccar's domestic business is assembly rather than manufacturing and as a result its return on invested capital (ROIC) has averaged more than 40% for the past 16 years. This demonstrates Paccar's ability to take its above-market returns and transform them consistently into tremendous shareholder value. As well as growing revenues by 8% and earnings by 14 % per year on average over the last 20 years, this firm has paid out 36% of net income and 55% of free cash flow to shareholders in the form of dividends and share buybacks.