Top stock picks from top pros

In the topsy-turvy market of the past five years, these managers led their funds to some of the best performances in their respective areas. Here's what they're bullish on now.

Seeking companies with steady growth
top picks top pro frels henneman
Frels, at right, with Henneman
Fund: Mairs & Power Growth (MPGFX)
Manager: William Frels and Mark Henneman
Tenure: 13 and 7 years
Fund type: Large-cap blend

The strategy

The managers of this Steady Eddie fund have a knack for finding fast-growing companies close to home.

Frels and Henneman start by looking for businesses poised to increase earnings at a rate faster than the average blue chip. They're willing to think smaller than average -- the market value of their typical holding is $14 billion, vs. $42 billion for the S&P 500. (This has worked to the fund's advantage, as smaller shares have whipped larger ones over the past five years.)

But that profit growth has to be sustainable, and the stocks have to be priced right. "We want to see 9% to 10% earnings growth consistently," Henneman says. By the way, they're not kidding when they say they want to "see" that growth. "We usually maintain a position in a stock for a long time, so we like to stay in contact with management," Frels said. No wonder two-thirds of the stocks in this $2.4 billion portfolio have operations in or near Minnesota's Twin Cities area, where Mairs & Power is based.

This quirky approach has paid off. The fund has consistently lost less during market downturns -- it beat 96% of its peers in 2008's financial panic and actually made money during the 2000-02 bear market -- while still getting a long-term boost from the smaller blue-chip companies that Frels and Henneman can identify. The result: Mairs & Power Growth has outperformed 93% of of its competitors over the past decade, according to the fund tracker Morningstar.

The opportunities

Frels and Henneman worry about the prospects for slowing growth in the U.S., especially if tax rates rise in 2013. As a result, the managers are focusing on American firms that generate a good chunk of business in the emerging markets. While growth has also been slowing in places like Latin America and China lately, those economies are still expected to expand at a far faster clip than the U.S.

The good news: You don't have to pay up for that international exposure in this market, according to the managers. Says Henneman: "We're not having any trouble finding names that we'd like to buy now."

Their picks

3M (MMM, Fortune 500): With a new CEO in tow, this Minnesota-based manufacturer plans to boost research and development. "That should set the company up nicely for long-term growth," Henneman says. So should the firm's global footprint: 3M generates about 70% of sales overseas.

Cray (CRAY): Cray may be a small stock, but this Seattle company is a pioneer in the supercomputer industry. After signing a deal with Intel last year, it will have a leg up in building and programming supercomputers for universities and government agencies. Says Henneman: "We expect an earnings growth rate of 15% to 20%."

Medtronic (MDT, Fortune 500): This maker of stents, defibrillators, and other medical devices has a competitive edge thanks to recalls at a major rival. And Medtronic's own outlook is also promising. The company, which generates nearly half of its sales abroad, "continues to expand into emerging markets, where health care spending is growing at a rapid rate," Frels says. Plus the stock's price/earnings ratio is a third of what it was a decade ago, after the tech wreck.

  @Money - Last updated February 05 2013 09:19 AM ET
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