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Illustration by Aaron Fernandez

After a decade of steady gains and the S&P 500 near record highs, it’s not easy to find stock-market bargains. But investors who remain patient — and willing to overlook a few warts — can still find plenty to buy, according to stock pickers with proven track records.

We’ve come a long way from the dark days of 2009. For the past 10 years through early December, the S&P 500 has returned 10.9% a year, on average. But as stock prices have climbed to ever new heights, corporate profits haven’t kept pace. Today, stocks trade at 23 times their current earnings, well above the long-term mean of 15.8 times.

To figure out which stocks offer the best chance of decent returns in such an expensive market, we spoke to three portfolio managers who’ve proven over the years that they know how to beat the market. While they all like different stocks, their approaches have some things in common. They tend to look for companies that the market has overlooked or soured on but that still boast strong cash flows and a durable competitive advantage.

Of course, finding all that in a single stock is a tall order. But as regular Money readers know, outsmarting the market isn’t supposed to be easy. Read on to find out where these mutual fund stars see the best bargains for 2020.

Courtesy of Jason Subotky

AMG Yacktman Focused (YAFFX)

Managers: Stephen Yacktman, Jason Subotky
Expense Ratio: 1.27%
Minimum Investment: $2,000

The Yacktman team looks at stocks the way most other investors look at bonds. They want investments that are safe and cheap, and which will throw off cash through dividends while they wait for prices to appreciate. It’s not just about a stock’s upside but the “risks associated with it,” says co-manager Jason Subotky. The team looks especially hard at how the companies use their cash. Will they acquire a rival? Funnel the money into research? Buy back stock? Whatever the decision, Yacktman Focused wants to know exactly how the strategy will create value for shareholders.

Yacktman’s concern with security also means the managers aren't afraid to sit out a rally or look abroad when they don’t like what they see in the U.S. Right now they're doing both, with roughly 25% of the portfolio invested in cash and another 24% in stocks that are domiciled outside the U.S., which is unusual for a U.S. large-cap fund. Despite these protective principles, the fund has returned 10% a year on average over the past 15 years, beating the Russell 1000 Value index by 2.6 percentage points a year.

Fox Corp. (FOX)

This household name has had a place in the Yacktman fund since 2008, when it listed as News Corp. After selling its film assets to Disney for $71.3 billion in March, the company that’s left is much slimmer — consisting primarily of the TV channels Fox, Fox News and Fox Sports.

One area where Yacktman sees opportunity is the September launch of Fox Bet, which made Fox the first major media company to offer an online betting platform for sports gambling. This and other investments funnel interest to Fox’s sports channels, which aren’t as impacted by cord-cutting as other channels that can’t offer live events among their core offerings.

Plus, Fox still owns the lot for FOX Studios, a “very valuable” piece of real estate, according to Subotky. The investments into betting and other areas have inflated Fox's forward price-to-earnings ratio to 14.3, but Subotky believes it’s building a lot of long-term value that should lead to “higher cash generation.”

Samsung Electronics Co. (SSNLF)

Like many semiconductor companies, Samsung is stuck in a cyclical downturn without a hot new technology to drive a surge in chip revenue. Meanwhile, its mobile phones sales have gone quiet and other smaller business lines – like appliances and televisions – are also failing to shine. The upshot: revenue fell 5.3% over the past year through the third quarter.

Yet, Yacktman sees it as incredibly cheap, trading at just 7.8 times earnings, well below its five-year average of 9.3 times. If a catalyst, like the new mobile network 5G, sparks a surge in business then there’s opportunity for the stock price to jump, since such a substantial technology upgrade would send millions of consumers to the stores to replace their phones. Samsung has a number of similar “shots on goal” to trigger a price appreciation, said Subotky.

Courtesy of Rich Einsinger; Toyama: David Nevala

Madison Mid-Cap (GTSGX)

Managers: Richard Eisinger, Haruki Toyama, Andy Romanowich
Expense Ratio: 0.98%
Minimum Investment: None

Richard Eisinger took over the Madison Mid-Cap fund in 1998, looking for companies that use free cash flow effectively to grow their businesses. A “bias towards conservatism,” as Eisinger puts it, means he wants to see the cash move the company forward over the next five years or more — not just the current earnings period. The fund has held about one-fourth of the 29 names in its portfolio for a decade or longer.

Despite operating in the mid-cap space, Eisinger and his partner Haruki Toyama still seek well-rounded companies, with multiple business lines or a clear competitive advantage. This keeps them away from one-trick ponies. For instance, they wouldn’t invest in a fashion brand that has one or two labels that could succumb to fads, says Toyama, who joined as co-portfolio manager in 2015. The strategy has worked. The fund returned 13.6% annualized over the past 10 years, compared to 12.9% for the mid-cap growth category average.

Dollar Tree Inc. (DLTR)

While there are plenty of stores with “dollar” in their name, Dollar Tree has done remarkable by actually keeping Dollar Tree store prices at $1, despite inflation, says Toyama.

It hasn’t been all clear sailing. The U.S. trade dispute with China and worries about the performance of Family Dollar, which Dollar Tree bought in 2015, have both provided temporary shocks to the stock price this year. The Family Dollar brand’s inability to hold the line at $1 opened it up to competition from convenience stores and grocers. With efforts to fend off the increased competition not taking hold, the chain’s revenue has grown just 5% over the past three years, compared to 15.5% for Dollar Tree stores.

Still, argues Toyoma, with Dollar Tree trading at $89, about 16 times 2020 earnings, investors are undervaluing Dollar Tree by throwing Family Dollar in “for free.”

O’Reilly Automotive (ORLY)

Commercial garages account for 43% of O’Reilly Automotive’s customers. These businesses need products fast, even if it costs a few bucks more. This protects O’Reilly from Amazon, since the online behemoth doesn’t have the infrastructure to serve these customers as quickly.

Indeed, with 342 hubs across the country and 27 distribution centers, O’Reilly can provide many products to the garages within an hour or so, says Toyama. And if a recession were to hit, it’s “resistant,” he adds, since more people would avoid buying new cars, opting to fix their current vehicles.

Photograph by Patrick James Miller

Causeway International Value (CIVVX)

Managers: Sarah Ketterer, James Doyle, Harry Hartford, Jonathan Eng, Connor Muldoon, Alessandro Valentini, Ellen Lee, Steven Nguyen
Expense Ratio: 1.13%
Minimum Investment: $5,000

With prices and valuations soaring, “something has to be wrong” with a stock if Causeway Capital’s International Value is investing, co-manager Sarah Ketterer likes to joke. Whether it's an underperforming business line or management snafu, these seemingly bleak cases provide potential upside in a bull market like the current one because “any bit of good news gets rewarded quickly,” Ketterer adds.

To separate companies that have merely hit a rough patch from the true poor performers, Ketterer and her team evaluate the source of the firm’s cash flows. If the source is robust, then there’s a chance they will invest, since the financial strength is “crucial” to withstand the unforeseen. For instance, Causeway bought Volkswagen AG in 2015 because it had 24 billion in cash on hand, even though the company struggled to respond to its emissions scandal. The stock has returned 73% since the end of September 2015, becoming Causeway’s biggest holding. Overall the strategy has helped Causeway return 5.1% a year over the past decade, beating the foreign large value category by 1.4 percentage points a year.

Rolls-Royce Holdings (RYCEY)

Ketterer currently sees a lot of opportunities in the U.K., where the fund is overweight compared to the Foreign Large Cap Value category, according to Morningstar, as many investors have shied away following the 2016 Brexit vote. Rolls-Royce, which develops aircraft engines (and not the luxury cars that share this company’s name), has performed “awful,” following struggles with its Trent 1000 engine, says Ketterer.

After poor test results and delays, Rolls declined to participate in powering Boeing’s planned mid-size jet, further hurting the stock. But Ketterer thinks the market has overreacted, overlooking the fact another engine line, which accounts for 60% of current order backlog has begun delivering to customers. She also likes that management has committed to reaching £1 billion in free cash flow on £16 billion of revenue by 2020.

Illustration by Aaron Fernandez

Micro Focus International (MCFUF)

Another UK firm, enterprise software maker Micro Focus has shed more than 64% of its stock value following the 2017 acquisition of Hewlett Packard’s software line, as revenue has declined 5.3% over the past year. But, Ketterer says, Micro Focus provides cloud services that few can replicate.

Plus, she believes investors have dinged Micro Focus as a result of uncertainty surrounding Brexit, even though 54% of its revenue comes from the Americas, including the U.S. Ketterer’s resolve is strengthened by the company’s cash flow, which has allowed the company to withstand the $8.8 billion cost of acquiring the new software line while maintaining an 8% dividend yield.