By mid-may, the s&p 500 index had soared 15.7% year to date, reaching record highs. Since the low of March 2009, the benchmark had vaulted a pulse-quickening 141.8%. The question on everyone’s mind: How long will this bull market last?

“The market remains near all-time highs and will likely experience at least a marginal correction,” cautions Chad B. Hoes, a portfolio manager at Parkway Advisors in Abilene, Texas, and co-manager of the $13.7 million Monteagle Select Value Fund (MVEIX)–which beat the broad market by 9.5 percentage points YTD. Such a correction, though, may be short-lived. “I expect the [overall] trend to continue to be positive,” he says.

The Overall Trend
No one can say for sure, of course. David Wright, co-manager of the $805 million Sierra Core Retirement Fund, which currently holds very little in equities, argues that U.S. stocks are “completing a topping formation. … The major trend will be downward for at least several months.”

Wright, based in Los Angeles, cites declining corporate earnings, payroll tax increases, the federal belt-tightening known as sequestration, and the ongoing credit crisis in Europe as reasons for his bearishness. “The market has been propped up by repeated Fed surges in the money supply, which have had relatively little benefit to the real economy,” he laments.

On the other hand, some investors have done very well with a more optimistic view. Marty Sass, chairman and CEO of M.D. Sass, a New York-based collection of investment portfolios, mutual funds and private equity partnerships with some $8.5 billion under management, says he has roughly kept pace with the S&P 500 YTD by finding misunderstood or overlooked bargains—an approach he intends to continue. “We’re in a secular bull market,” Sass contends. “This bull market has legs. We will reach new highs.”

Uncovering Hidden Gems
Sass has been “underweight consumer staples and utilities,” he says, judging them to have little room to grow. Instead, he finds opportunities in overlooked information-technology and health-care stocks. Specifically, he’s enthusiastic about a Parsippany, N.J.-based drugmaker called Actavis, which specializes in generic injectable drugs and has “a number of branded medications that will launch next year,” says Sass. Through mid-May, the shares were up nearly 40% for the year, and Sass insists, “There’s still a lot of upside.”

Another recommendation is Towers Watson & Co., a New York-based manager of employee benefits programs that’s recently branched out into health-insurance exchanges—“a market with large potential because of the Affordable Care Act,” says Sass. Its shares, too, had already advanced nearly 38% in 2013, but Sass is sticking with them.

Using Valuation
Sass’s brand of old-fashioned, bottom-up, fundamental analysis may be a great way to uncover bargains, but many market participants rely on complex valuation calculations. Chicago-based market tracker Morningstar’s discounted cash-flow metric determined that, in mid-May, the “average stock is trading at about a 3% premium to its estimated fair value,” says Matt Coffina, editor of the Morningstar “StockInvestor.” “This indicates the market is between fairly valued and slightly overvalued.”

This, however, isn’t a prediction of where equities are headed, Coffina explains. After all, they can become increasingly overvalued and stay overvalued for a long time. “It’s just that there’s more risk and less opportunity than there has been for some time,” he says.

Sector Analysis
Digging deeper, certain sectors appear more overvalued—and therefore riskier—than others. “Defensive sectors such as consumer goods, health care and utilities have been leading the rally so far this year, and these appear to be some of the more fully valued areas,” says Coffina.

To put it another way, large-cap companies that pay regular, sizable dividends have been “outperforming more cyclical names,” he says. A likely reason: With bond yields at record lows for so long, investors have been turning to stocks that generate yield. “Investors have been flocking to the more conservative names, the ones that are relatively easy to get comfortable with,” theorizes Coffina. But if the Federal Reserve reverses course and bond interest rates rise, market sentiment will almost certainly shift.

That, he adds, leaves sectors such as basic materials, energy and technology as undervalued, with “a relatively large number of opportunities.”

Overlooked Factors
Another overlooked opportunity may lie in rising U.S. housing starts and home prices. “Investors are failing to appreciate what a significant positive the turn in housing is,” says Alexandria, Va.-based Tim Holland, who manages the $1 billion ASTON/TAMRO Small Cap Fund and the $25 million ASTON/TAMRO Diversified Equity Fund, which over the past three years are up 16.24% and 11.86%, respectively. The swell in housing numbers “positively impacts consumer sentiment and spending and GDP,” he says. This, in part, is why Holland remains “particularly constructive on more domestic-facing sectors,” he says.

Natural gas is another oft-cited area of possible upward surprises going forward. “Natural gas prices have nearly doubled in the past year, but a lot of the smaller exploration and production companies have not rallied,” says Mark Travis, president and lead manager of the Jacksonville, Fla.-based Intrepid Capital Fund, which has net assets of $420 million (the ticker is ICMBX).

Among Travis’s picks: Denver-based Bill Barrett Corp.; Newfield Exploration Co., headquartered in the Woodlands, Texas; Houston’s Swift Energy Co.; and Northern Oil & Gas, based in Wayzata, Minn.

The natural-gas theme resonates with Russell Croft, co-manager of the $300 million Croft Value Fund (CLVFX). Based in Baltimore, Croft sees natural gas as part of a growing demand for energy and infrastructure companies. “Owners of natural gas assets and providers of infrastructure will be major beneficiaries,” he predicts.

What Goes Up …
The trick, of course, is to buy low and sell high. Parkway Advisors’ Hoes says his Monteagle Select Value Fund relies on a “reversion to the mean” philosophy: In short, what goes up must come down, and vice versa. “Our proprietary model isolates the performers with the most positive appreciation potential,” he says.

Recently, this approach led him to purchase shares of Pleasanton, Calif.-based grocery chain Safeway, when they dipped below $20 in January 2013. “While I didn’t purchase at the absolute bottom,” Hoes acknowledges, it “is currently around a 35% gain.”

Looking to the future, Hoes is especially bullish about information technology and financials, sectors which he points out have lagged the S&P 500. Certain energy concerns seem ripe for a positive surprise, too, he says, such as Rowan Cos., a Houston-based offshore oil and gas driller. With the stock in the low 30s, his target price is “around $41.”

Beyond Valuation
But if the overall market has plateaued, what signals a change ahead? “It’s been all about yield,” observes Mark Freeman, chief investment officer of the Westwood Holdings Group in Dallas, Texas, and senior manager of the Westwood Income Opportunity Fund, which has nearly $1 billion in assets and has returned more than 16% over the past year.

Freeman’s fund has done well owning shares of large-cap dividend payers such as General Mills, Johnson & Johnson, General Electric Co. and PepsiCo. But for him, the momentum has shifted. “Now we’re looking for companies that are able to serve end markets with growing demand and pricing power,” he says. “It’s going to have to be a combination of yield and growth.”

Giving Back to Shareholders
Freeman is particularly enthusiastic about cash-rich tech companies that are starting to deliver dividends. “Management is getting the message,” he says.
That message is, use your excess cash flow wisely. Brad Hinton, co-manager of the $844 million Weitz Partners Value Fund, puts it this way: “Management teams that allocate capital well can take advantage of historic low interest rates to acquire companies using cheap financing, or to repurchase their own undervalued shares, both of which can enhance per-share business value over the long term.” Hinton’s fund, based in Omaha, Neb., advanced 15.85% over the most recent 12 months.

Here, tech companies might have a big advantage. “Over the next 12 months, we see the technology sector as having the best chance to outperform [because] it has lagged for two years and is as cheap as it has ever been,” says Bob Turner, chairman and chief investment officer of Turner Investments, a Berwyn, Pa., firm with $10.7 billion in assets under management. “The worst sector will be utilities. They trade at record valuations because of the grab for yield.”

In tech stocks, some market watchers are paying particular attention to the small-cap arena. “The market is overlooking [their] sales and earnings growth,” observes John Barr, lead manager of New York-based Needham Aggressive Growth Fund, which has $59.07 million under management. The fund is up 11.4% in the past three years.

Barr specifically favors Brookfield, Conn.-based Photronics, which develops high-precision photographic plates used to make semiconductors, and Entegris, a Billerica, Mass.-based supplier of components for fabricating microelectronics. Both serve rapid-growth niche markets and are possible takeover targets, he explains.