On the Money: Picking good stocks has become harder to do

Just as people are starting to develop the stomach for investing again, professional investors say stock picking has become a challenging endeavor.

The best deals evaporated quickly in the rally that followed the early March stock market sell-off. Now that the market has climbed roughly 40 percent since early March, investing doesn't seem as scary, but it requires deeper analysis and provides less clarity on value.

You could see the lack of conviction at a recent Morningstar conference as renowned mutual fund managers described what they are buying now and why.

This year, an investor would have been hard-pressed to find a common view among the pros other than the belief that the worst of the financial crisis has likely passed and that the economy will show lackluster growth for several years.

The view is what Pimco bond fund manager Bill Gross calls the "new normal," or a period of perhaps a decade when the economy won't be able to grow vigorously because consumers are out of jobs and laden with debt. As they save more and spend less, companies worldwide are expected to have trouble increasing their profits. Gross said he thinks the stock market's returns might be about 6 percent annually for an extended period.

Against the uncertainty and higher stock prices left in the aftermath of the powerful rally, some fund managers said they feel more comfortable buying corporate bonds now than stocks. That's unusual behavior for stock pickers.

Fairholme fund manager Bruce Berkowitz said he's never seen bonds so cheap. He likes earning double-digit yields while having some protection in the case of bankruptcy. Stocks generally are worthless if a company goes bankrupt, and that's an important consideration now because the bankruptcy rate is expected to soar amid financial troubles. In a bankruptcy, bondholders lose money but usually end up with something, even if it's pennies on the dollar.

Berkowitz is buying stocks, too. For example, he has made a major investment in Pfizer pharmaceutical stock. He is focusing in this tough environment on companies with sizable cash positions or free cash flow.

But in a sign of the times, and a lack of agreement among professionals, Berkowitz's peers at the conference saw Pfizer as a controversial stock pick. Health care is one of the few sectors that did not soar in the rally, creating possible opportunities for investors attentive to stock prices.

But Rajeev Bhaman, manager of Oppenheimer Global, questions whether pharmaceutical stocks will turn out to be a value. He argues that health-care stocks were not carried away by the rally because of the threat that Congress will adopt health-care changes that will stifle profits. Also, he faults pharmaceutical companies for sitting on cash rather than investing aggressively in research and development to lead to new products.