Make these 9 top investments in a 'stock-picker's market' as economic growth continues, according to a bear-turned-bull whose hedge fund is up 155% in the last 5 years (2024)

Investors had little reason to doubt Lemonides' convictions about stocks and the economy, given that his long-biased fund had risen 600% in the prior 10 years heading into January.

But this year hasn't been the bloodbath Lemonides anticipated. To the contrary, US stocks have crushed expectations by rising 16.7% year-to-date, and the investment chief has missed out. His hedge fund is down 8% in 2023 through May, though it's still up 155% in the past five years.

Although the massive market crash he warned of didn't materialize, Lemonides recently told Insider that a modest pullback could continue in the coming weeks after such a robust rally.

"It was a very big bounce, and I think it probably was overdone," Lemonides said in an interview with Insider. "And so I think investors did get complacent and overconfident on the way up. We've just seen, depending upon how you measure, a 3% to 5% correction in the past couple of weeks. It wouldn't be surprising to see that go another 3% to 5% in the near term."

The economy's momentum can continue, even if growth slows

However, Lemonides still sees several opportunities in markets, in part because he's changed his tune about the economy. The recession that once looked certain is now a long shot, he said.

"I think the only way you're likely to get a recession at this point is from an exogenous shock from the commodity markets based on something that happens geopolitically," Lemonides said, though he added that such an outcome is "a very real risk."

The consensus among market strategists entering this year was that the US economy would contract as stubbornly high inflation forced the Federal Reserve to keep raising interest rates.

Instead, inflation has steadily slowed without growth following suit. One possible explanation is that monetary policy takes months to leave an impact, though Lemonides also noted that rates are still at a modest absolute level despite making a massive relative jump.

"You went from uber-accommodative to accommodative, and now you're just barely in the restrictive territory," Lemonides said. "So it makes sense that the economy hasn't come to a grinding halt, given where you were coming from in terms of monetary looseness to monetary tightness."

The hedge fund manager said the economy can take another rate hike or two, even though investors may groan about it. As he put it, "it's just not the end of the world for the real world."

"I don't think this amount of tightening is going to trip us into a credit crunch and a recession," Lemonides said. "I think the markets have adjusted to this amount of tightening."

While the labor market appears to be immune from rate hikes, Lemonides said employers are indeed feeling the impact of tighter financial conditions. Although the unemployment rate is near historic lows, the pace of job additions has abated because the US is close to full employment.

Still, this expansion should continue for the foreseeable future, in Lemonides' view, considering that the economy moves more like a giant ocean liner than a nimble sports car.

"There was a lot of positive momentum, and that momentum takes time to turn around," Lemonides said of the labor market and economy.

9 places to put your money right now

A modest 5% pullback shouldn't scare investors away. In fact, a slight dip can serve as an entry point for a broader market rally that's driven by more than just large-cap technology stocks.

"It's a good stock-picker's market going forward," Lemonides said. "We don't think it's just going to be the nifty 20 that carry the next 20% up-leg in this market. And we think those nifty 20 could be down significantly if we do get a hiccup in the markets."

When Lemonides last spoke with Insider in mid-December, his recommendations ranged from streaming giant Netflix to a pair of sizable semiconductor makers to a trio of small energy firms. All six companies he highlighted have risen since then, and some are up dramatically.

The hedge fund manager is currently bullish on energy stocks broadly — particularly those in the oil and gas industry. Some companies in the sector have gotten more expensive after their valuations implied obsolescence a few years ago, but many remain cheap, Lemonides noted.

While investors can always use exchange-traded funds (ETFs) like the Energy Select Sector SPDR Fund (XLE) or SPDR S&P Oil & Gas Exploration & Production ETF (XOP) to get exposure to the energy sector, Lemonides reiterated his interest in energy services firm Valaris (VAL). He also mentioned exploration & production companies Chord Energy (CHRD) and Unit Corp (UNTC). All three firms stand out for having cheap valuations and strong free cash flow.

There are also opportunities within financials, including investment bank titan Goldman Sachs (GS) and, on the other end of the spectrum, distressed banks. The latter group got crushed during the banking turmoil of early 2023 but have enticing risk-reward prospects, Lemonides said.

Two more stocks trading at eye-catchingly cheap valuations are food wholesaler United Natural Foods (UNFI) and lift-truck seller Hyster-Yale Materials (HY), Lemonides said.

United Natural Foods mismanaged both inflation and the acquisition of grocery chain SuperValu, but the fund manager said it's "off-the-charts cheap" given the $5 per share in earnings he sees it generating in the coming years. Plus, he doesn't think its $2 billion in debt is a big burden.

Hyster-Yale Materials also appeared to be blindsided by price growth early in the pandemic and had priced its products too cheaply, Lemonides said. However, he said the company has a formidable competitive position, sizable margins, and far more demand than it can meet.

"I think the market's littered with these very different investment ideas that aren't just like, 'Wow, AI's going to take over the world,'" Lemonides said.