As the manager of a stock fund with more than $3 billion in assets, Bart Geer is not the kind of shopper you would expect to see wandering the aisles at Big Lots, a retailer known more for closeout prices than high-end clientele. But Geer, who has managed the 33-year-old Putnam Equity Income fund for almost a decade, figures that investing in the stock of Big Lots is a great way to capitalize on his expectations for a continuing economic recovery.

The retailer generates lots of cash and keeps a tight rein on costs, which allows it to squeeze out maximum earnings from every dollar of sales. Those earnings should exceed analyst expectations as the economy gains steam and sales perk up. And the stock, selling at 11 times estimated earnings, represents a solid value.

Then there's the powerful draw of the deal. "Big Lots has a loyal customer base of bargain hunters who will go out of their way to visit stores," says Geer. "Its aggressive pricing across lots of different products persuades people to change their shopping behavior." Those customers pushed retail sales for the company's most recent fiscal quarter up 6.9% over the previous year.

In Geer's view, companies with ample cash flow such as Big Lots that can take advantage of a broadening economic recovery and exceed analysts' earnings projections will be this year's market leaders.

By contrast, fire-sale price stocks led during last year's rally, including battered banks. Geer showed his contrarian side in early 2009 when he established positions in then-unpopular banks such as Wells Fargo, Bank of America and State Street Corporation. He added the last company in January after credit agencies downgraded its debt and investors cut the stock price in half. Geer felt that State Street, as one of the world's largest security custodians, was being punished too severely and would remain profitable. But the company's stock rose sharply during the year, along with other financial names that benefited from the ebbing of panic in the financial system, and helped his fund beat its benchmark, the Russell 1000 Value Index, by 7.5%.

With last year's rebound rally behind him, Geer is turning his attention to cyclical recovery plays. He sees evidence of economic recovery on a number of fronts-in positive earnings trends and in the large number of companies exceeding analyst estimates. "Cash flow margins are near all-time highs, which is extraordinary given that the bulk of the economic recovery has not even kicked in yet," he says. "Companies have generally done a good job of managing through the downturn."

He expects the stock market to deliver positive returns for the year as earnings catch up with higher stock prices, though a repetition of last year's bounty is unlikely. "Valuations are obviously not as cheap as they were last year, but they are still relatively attractive," he says.

But periodic bad news continues to overshadow positive trends. At the beginning of the year, stocks plunged on reports of government efforts in China to head off inflation through lending constraints. More recently, high employment and slow recoveries in Greece, Spain and Portugal have raised concerns about the prospects for European markets.

Geer believes that while those southern European countries will continue to lag other world economies, most countries in Europe remain on firmer ground and will continue to step in to help steady the financial health of their poorer neighbors and reassure investors. "My view is that we're primarily domestic investors, and these issues are not central to the U.S. economy."

In this country, he sees signs of stability in the housing market as excess inventories diminish and demand catches up with supply. The commercial construction industry, while still sharply curtailed, should still work through its indigestion over the next year or two.
"Both housing and auto industries have passed their worst points," he says. "More importantly for investors, the market has already heavily discounted those stocks."

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