Veteran investment strategist spotlights 3 top stocks

After the S&P 500 surged to 43 record closes this year, the stock market is full of questions.

Will the rally continue? Is there a patch coming soon? What is the outlook for small-cap stocks versus large-cap stocks? What is the outlook for growth stocks versus value stocks?

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To answer these questions, we turned to veteran market strategist Robert Doll as part of our expert interview series.

He is now the chief executive officer and chief investment officer of Crossmark Global Investments, which had $6.8 billion in assets as of June 30. Doll was formerly chief equity strategist at Nuveen and BlackRock.

We also discussed some of his favorite stock picks. Here’s what he had to say.

Bob Doll, one of the country’s leading stock strategists/managers, is wary of the market.

Crossmark Global Investments

TheStreet.com: What are your scholarship prospects for next year?

Doll: We are in a momentum driven bull market. Predicting the end is a fool’s game – impossible. At these levels, with expensive valuations, bulls assume a soft economic landing, inflation under control, the labor market and consumers OK, and earnings growth good.

Bears say the economy is weakening and earnings estimates are too high. They say consumer spending is slowing, as evidenced by falling confidence and rising debt. They note that the world is a mess. With valuations this high, things had better be close to perfect (for stocks to go up), they say.

I am cautious, although I am not a bear.

TheStreet.com: Are you expecting a 10% stock market correction soon?

Doll: On average, corrections of this size occur once a year. Something has to go wrong, like a bumpy landing—not a slowdown—instead of a soft landing. Or the price of oil goes up. We may get a 10% correction in the next few months.

TheStreet.com: What are your thoughts on large-cap stocks vs. small-cap stocks and growth vs. value?

Doll: Small-caps tend not to do well in economic downturns/recessions. Anticipating a slowdown makes me wary of small caps. But small-caps are priced so much lower than large-caps that they should do well when the economy comes out of the doldrums.

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We have growth and value stocks. But for value, I don’t just want cheap stocks: they have to have something going for them. We want growth stocks for when the economy slows down. Growth does better than value in a slowing economy. Over the next 12 months, I think value will do better.

TheStreet.com: Are there certain industries you like?

Doll: We like financial stocks because they are cheap relative to their history. Their balance sheets are in better shape than normal this part of the cycle. That’s because the loans went outside the banks.

Overall, it’s less about sectors now and more about factors. (Important factors include) high and predictable earnings and good – and preferably improved – cash flow. In a way, that describes the quality. Those stocks did well.

If there is a period of neglect due to a weak economy, those themes will carry over. You can find such actions in any sector.

Our core Steward Large-Cap fund (SJCAX) it has a price-to-free cash ratio of 13 versus 22 for the Russell 1000. And the equity fund’s return is 24 versus 22 for the index.

These ratios are good measures of which portfolios will perform in uncertain times.

Related: $4 billion fund manager spotlights 3 top stocks

TheStreet.com: Can you talk about three of your favorite stocks?

Doll:

1. Swan (BUT) the health insurer/pharmacy benefits manager. Its price-to-earnings ratio is at a 30% plus discount to the market. Its long-term earnings and dividends have annual growth prospects of 10%.

It has great basics at a cheaper price. Many health care stocks do not fare well near the election due to potential health care legislation. But Cigna has no exposure to Medicaid and only a small Medicare program.

The main risk for Cigna is that the cost-to-income ratio is slowly increasing.

The fund manager buys and sells:

• Experts cite stocks to buy after Fed rate cut
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• Top Value Fund Manager Says Alphabet Is Deep Value Stock

2. American Express (AXP) credit card company. It is growing. As membership and usage grow, so does net interest income. It has a richer customer base than its competitors.

So they should face fewer problems in an economic crisis. It is selling at a (high) valuation of 20 times earnings. So you hold your nose and buy.

3. Lowe’s (LOW) the second largest home improvement company after Home Depot (HD) . There is a wide gap in profitability and profitability between the two, with Lowe’s lagging behind.

But Lowe’s is closing the profit gap. Improve inventory and operational controls. And its finances reflect this: it has had good earnings.

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