U.S. shares are 27% cheaper than a year ago, even after climbing 15% in the second quarter. During the first half, though, the value of announced acquisitions in the U.S. fell 45% from a year earlier, according to data provider Dealogic. TrimTabs, an investment research group, calls the second quarter the most bearish it has seen since it started tracking data in 1995, in terms of companies' zeal for selling new shares to the public and their reluctance to spend cash to buy either their shares or entire companies.

Investors should read that as a sign of stock-market pessimism among company managers, which signals poor market returns to come, according to TrimTabs. Perhaps that makes now a good time to raise cash, or at least trade pricey stocks for cheap ones. To the latter end, I've listed five companies below that corporate suitors might think are good deals right now, if they weren't so reluctant to spend. Some of the traits that can make a company a potential takeover target can also make it a promising stock. Chief among them is a modest price.

The companies have, in the parlance of merger and acquisition pros, low EV/Ebitda ratios. EV is enterprise value, which is what an investor would pay to buy a company in its entirety and repay all of its debt. Ebitda stands for earnings before interest, taxes, depreciation and amortization. It's a measure of underlying profit potential that allows for tidy comparisons of companies. A low EV/Ebitda ratio, then, means a company had a modest takeover price relative to its earnings potential. The companies on my list also generate free cash, something acquiring firms like to see.

BJ's Wholesale Club (BJ) shares have climbed 31% over the past five years, vs. an 18% decline for the S&P 500. They now sell for 13 times forward earnings, vs. more than 16 times earnings for the index. Sales and profits for BJ's are rising at the moment, as consumers forsake full-price shops for discount clubs. The company has low profit margins relative to peers like Costco (COST), but also increasing margins, which together suggest both improvement and room for more of it.

Dell (DELL) has suffered sharp sales declines of late, but it has reduced corporate expenses and still produces impressive returns on equity, the mark of an efficient company. In the absence of a global economic recovery, the chief appeal of the stock for investors is a low price. Subtracting the company's sizable cash balance from its stock price, shares go for about 10 times forward earnings.

Listed below are details on these two companies and three others.

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Yet, even as all those detrimental factors played out, in March, the market quietly started staging a comeback. According to Lipper, the average S&P 500 index fund gained 15.7% during the second quarter and has now increased 3% year to date. Meanwhile, the average domestic equity fund has climbed 6.5% over the last six months and the average world equity fund has jumped 14.7%. That still doesn’t make up for a dismal 2008, but the performance does seem to indicate that investors are putting some of the bad news in the rearview mirror and are once again comfortable investing in stocks.

“It was a wild six months to try to lump together,” says Stacey Schreft, director of investment strategy at The Mutual Fund Store, headquartered in Overland Park, Kan. “As dramatic as things fell they turned around.”

Adds Ron Rowland, president of Capital Cities Asset Management in Austin, Texas: “Year to date, it looks like nothing ever happened.”

This week, the SmartMoney.com fund screen takes a break from its normal routine to focus on overall fund performance during the first half of 2009. Instead of looking at individual funds with good track records in their respective categories and low fees, we simply list the six-month performance of 24 key fund groups tracked by Lipper. Consider it a first-half report card for your portfolio. We do this screen for an important reason: By staying aware of fund returns, investors can hopefully spot burgeoning trends.

Indeed, one of the emerging themes of the first half of 2009 was the thumping growth funds gave their value counterparts. As you can see from the table below, growth funds easily outpaced value funds up and down the market capitalization spectrum. That trend had been playing out before the market took a nosedive last year — at that point, value briefly trumped growth — but now the gap is widening and many market experts think it will continue to do so since growth stocks historically tend to lead the market out of its doldrums.

“I have been in favor of growth since the middle of ‘07” says Rowland, who hung onto his growth fund holdings even as investors fled to safety.

Now, there were some fund categories that didn't do all that well. Financial services funds gained 27.4% during the second quarter after most big banks passed the government's "stress tests" and were able to raise capital to repay federal loans. However, the category is still down 3.4% in 2009. Real estate funds dropped 9.5% the last six months and equity income offerings, the funds that focus on dividend-paying stocks, managed to eke out a mere 1.2% gain.

But at the same time there were also some eye-popping returns. Technology funds soared 24.6% thanks to some M&A deals and opportunistic buying after tech stocks got hammered in 2008. Investors also became more willing to take on risk after fleeing to safe havens last year. The average emerging markets fund gained 34.2%. Latin America offerings, a subset of emerging markets, increased 44.5%. That was the single biggest increase in the first half of any of the 68 equity categories tracked by Lipper.

Investors shouldn't get overly excited about those rosy returns. “We clearly see people chasing returns,” says Schreft. And many market watchers think another event — rising unemployment, a failed bank, inflation — could cause the rally to quickly cool off. “I think it’s probably safe to say the complete meltdown and disruption of big financial institutions that was scaring everybody months ago is not going to happen,” says Rowland. “The worst case scenario is now off the table. However, the next worst case is still a possibility.”

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For stock investors, the relative stability of sales makes the measure more reliable than earnings for purposes of deciding which companies are cheap. Run a search for low price/sales ratios and you’ll uncover promising stocks that a search for low price/earnings ratios might miss. Moreover, according to market researchers like James O’Shaughnessy, who conducted a study of the matter for his investment guide “What Works On Wall Street,” the P/S ratio is a better predictor of stock performance than the P/E.

The companies below have low P/S ratios, stable or growing sales, strong balance sheets and decent dividends.

Boeing (BA) last week announced another delay in the test flight of its fuel-efficient 787 jetliner, which is now two years behind schedule. Qantas, the Australian carrier, cancelled orders for 15 of them. The delays are embarrassing for Boeing, but not uncommon in the industry, and analysts see little danger of customers defecting to its European competitor, Airbus, which is years behind Boeing in development of its competing A350 (although some carriers, like Qantas, might use the delays as an opportunity to put off orders during the current travel downturn). Boeing’s sales are still expected to increase 11% this year, and profits are projected to rise 23%. I recommended the stock in early March as one of “9 Stocks That Could Double Your Money.” It’s up 42% since that column ran but still looks cheap and comes with a 4% dividend yield.

Nothing says “recession” quite like canned chili. While most casual dining chains are suffering sales declines this year, Hormel Foods (HRL) is on pace for a 2% improvement in sales and an 11% rise in profits. The stock has climbed 12% since I highlighted it at the end of 2008 in a search for insider buying, but its P/S ratio still stands at a discount of 25% to that of Kraft (KFT). The company has a pristine balance sheet and pays a 2.2% dividend. It has topped Wall Street’s earnings forecasts in recent quarters by double-digit percentages, suggesting operational momentum that’s catching investors by surprise.

Scott’s Miracle-Gro (SMG) had a painful urea problem when I recommended the stock in July 2008. The nitrogen-rich compound, discarded freely by humans but manufactured by chemical companies using ammonia and carbon dioxide, had soared to $800 a ton on agricultural markets, crimping profits for fertilizer sellers, including Scott’s. A ton of the stuff now costs closer to $250, just in time for Scott’s to lock in new supply contracts. Shares are up 81% since my recommendation, vs. a 27% decline for the S&P 500. Even now, they still look reasonably priced, and while the stock’s 1.4% dividend yield is puny, it’s also easily affordable relative to profits.

Have a look if you like at the table below, which has details on these three and two other companies my P/S search recently turned up.

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That said, hundreds of companies pay at least 4% at the moment. That’s about double the average rate offered by banks on one-year certificates of deposit. Of course, CDs offer a guarantee of principal protection, but they come with some unwanted guarantees, too. They are guaranteed not to increase in value beyond their interest payments. The payments themselves are guaranteed not to grow during the life of the CD. If inflation picks up, long-term CDs are almost guaranteed to fall behind in their ability to protect investors’ buying power.

A 4% dividend yield, by contrast, can grow over time, offers the potential of capital gains on the side and can help protect against inflation. Of course, all of this depends on the company paying the dividend, and its prospects for prosperity in coming years. Below are five financially strong companies paying more than 4%. Each has a modest valuation and relatively stable sales.

Philip Morris International (PM) sells Marlboro and other top cigarette brands in 160 countries outside the U.S. The stock is more expensive than its domestic sibling, Altria (MO), at 14 times forward earnings versus 9. The International company also comes with a smaller dividend: 5.1%, compared with 7.8% for the American company. But those numbers still compare favorably with the broad stock market, and Philip Morris International has limited exposure to lawsuits and better growth prospects than the U.S. tobacco industry.

ConocoPhilips (COP) stock trades at less than half its price of a year ago, when Warren Buffett was loading up on shares for his investment vehicle, Berkshire Hathaway (BRK.B). It’s by no means the top performer in the oil and gas industry. Analysts expect the company’s production to flatten for the next few years after an increase of 3% or so this year. To help make up for its weak production outlook, Conoco has been an aggressive acquirer. As a result its debt since 2005 has increased from 19% of capital to 34%. That’s a manageable sum, but it reduces the portion of the company’s cash flow that’s free to be put toward new drilling. All that said, Conoco sells for less than 13 times this year’s pitiful earnings forecast and less than 7 times what Wall Street figures the company might earn next year. Relative to the company’s profits, its 4.5% dividend yield looks plenty affordable.

Will Verizon (VZ) get the iPhone next year, once Apple’s exclusivity pact with AT&T (T) runs out? There’s a good chance, judging by Apple's recent announcement that long-awaited data features for its iPhone are now available through most carriers world-wide, but won't be available until later this year through AT&T. The real reason to like Verizon isn’t just that it provides the least-bad cellphone service of a sloppy bunch, but that its stock comes with one of the biggest, affordable dividend yields around: almost 6%. Sales are expected to increase 11% this year, as its flourishing wireless business more than makes up for withering landline accounts.

Have a look if you like at details on these and the other two high-yielders below.

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“I am not trying to replicate the returns of some index,” says Lutts. “I want to grow my clients’ money.”

Considering that the average emerging market fund lost 55.5% last year (the plain vanilla S&P 500 index fund lost 37.3%), Lutts' heavy weighting may sound surprising. To some, however, the move is prescient. As investors take their money off the sidelines they are investing in both U.S . equities and international ones. According to Lipper, the average emerging markets fund is up 33.3% this year. Such a performance is reminiscent of the category’s pre-2008 levels when investors flocked to investments in countries like China and India.

Of course, it's hard to tell if the latest run will continue. SmartMoney.com decided to focus on emerging market offerings this week to see which funds are pulling ahead of the pack. There are 464 funds and share classes in our database that focus on emerging markets like China, India, Russia or regions like Latin America. We disqualified 401 for charging a sales load. We then searched for funds that had low fees and above-average three- and five-year track records. In addition, the funds needed to have a year-to-date return that exceeded the average international offering. In the end, we were left with just two funds.

Investing in emerging markets come with risks — and rewards. In a good year, the typical emerging market fund can easily outpace their U.S.-based counterparts. That was certainly the case in 2006 and 2007 when China funds gained over 50% both years.

But there are plenty of stumbling blocks that can puncture that performance. Liquidity — the idea that investors can build a position and then sell it when they want — is often a problem especially in smaller emerging economies.

These markets can also be volatile as the hot money tends to exit as quickly as it enters. And investors must also consider geopolitical risks, like those playing out in Iran or North Korea.

All those concerns make picking the proper investment vehicle a difficult task. Lutts prefers to buy the shares of individual companies he comes across during his travels. Baidu.com (BIDU), the Google-like search engine company based in China, is one of his favorites.

But if individual stock-picking seems too risky, another way to play emerging markets is to invest in an ETF geared toward a particular country. The iShares exchange traded fund family has made it easy to either bet on regions or individual countries. For example, the iShares Turkey (TUR), South Africa (EZA), Brazil (EWZ) and Taiwan (EWT) funds each focus on those respective countries. Investors should just be mindful that ETFs such as these still come with a lot of volatility.

“We are allocating more money to emerging markets,” says Robert Phillips, managing partner of Spectrum Management Group in Indianapolis. But, he warns: “It doesn’t take a lot of money flows to influence prices.”

Another option is an index fund. Vanguard Emerging Markets Stock fund (VEIEX) owns stocks in about two dozen emerging markets. Its largest holding is China Mobile. An alternative to an index fund is to pay for a managed offering in order to gain access to a manager who knows the ins and outs of overseas investing. We’ve included both types of funds in the table below.

The Criteria: The funds that made our list this week are classified in Lipper’s emerging markets category. They are open to new money, require a minimum investment under $5,000 and charge an annual expense ratio less than 1.5%. Their three- and five-year track records put them in the top 40% of that category. In addition, they also had to beat the year-to-date performance of the typical international fund, which, according to Lipper, stands at 14.2% through Thursday. As usual, we did not include load funds.

Fund Type = Emerging Markets *
Annualized 3-Year Return (%) = Display Only
Rank in Classification (%) (3 year performance) <= 40
Annualized 5-Year Return (%) = Display Only
Rank in Classification (%) (5 year performance) <= 40
Expense Ratio <= 1.5%
Load Fund (type) = No Load
Minimum Initial Investment <= $5,000
Open to New Investors = Yes
Total Net Assets ($ millions) >= 50
Year-to-Date Return (%) >= 14.2%

* The screen does not include emerging market fixed-income offerings.

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Free cash flow is simply the money a company puts in the till each quarter. Earnings are how much it would have put in the till if not for, say, the purchase of a new factory. In earnings accounting, the factory’s cost gets broken into small quarterly charges to be deducted over the factory’s projected life. While that might seem complicated, investors tend to fixate on earnings because the measure smoothes the effects of big, sporadic investments and thus makes it easier to tell whether companies are making more money from one year to the next. Lenders prefer to watch free cash flow, since it gives a better sense of financial strength.

Over long time periods, the two measures tend to revert to each other because they track more or less the same thing using different timing. Therein lays a clue to stock performance. When a company’s paper earnings are puny but its free cash flow is strong, it could be a sign that earnings are temporarily depressed and due to rise. Since stock investors tend to shun companies with poor earnings but flock to ones with strong earnings, a company with understated earnings relative to its free cash flow might be poised to produce generous stock returns.

University of Michigan professor Richard Sloan published a landmark study of the matter in 1996. He found that companies whose earnings were understated relative to their free cash flow returned 10 percentage points a year more than those whose earnings were overstated. Dozens of follow-up studies published in recent years have continued to document this “accrual anomaly,” as it’s called. (“Accrual” is an accounting term for those earnings excuses that cause the measure to differ from free cash flow.)

Stock investors can use the accrual anomaly in two ways. The first is to pay attention to the difference between earnings and free cash flow for the companies they invest in. When a company consistently reports stellar earnings but weak free cash flow, investors ought to be wary. The second way is to run a stock screen for companies with more free cash flow than earnings. Such companies might be understating their prosperity at the moment, making their shares temporarily cheap.

Note that while earnings are listed on companies’ financial tables, free cash flow isn’t. Some finance web sites and stock-screening programs list the measure, including SmartMoney.com and its screener. Investors can also calculate free cash flow on their own with a bit of hunting through financial tables, but no tricky math. Start with earnings (found on the income statement), add depreciation and amortization (income statement), subtract capital expenditures (cash flow statement) and subtract any change in working capital (balance sheet—it’s the net of current assets and current liabilities).

Easier still, have a look at the five recent screen survivors below. All produced far more free cash than earnings over the past year, have low share prices relative to their free cash flow and pay decent dividends. Genuine Parts (GPC) and Pitney Bowes (PBI) are up 25% and 16%, respectively, since this column recommended them in March for their meaty dividends. Home Depot (HD) is perhaps an odd stock to embrace during a housing downturn, but a secure 3.8% yield adds appeal and some analysts believe even a muted housing recovery could double the company’s profits. Eli Lilly (LLY) boasts growing sales despite lax consumer spending, since drugs aren’t especially sensitive to the economy. Finally, Illinois Tool Works (ITW), a roll-up of more than 800 small industrial businesses that make everything from welding equipment to refrigerators, has reported soft sales of late but is using the downturn to buy struggling firms on the cheap.

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For investors shopping for stocks, the news is mostly good. Screening software can help identify plenty of young companies that are growing nicely through the current recession, but which are largely being ignored by analysts -- at least, for now. Such companies might be among the first to benefit when investment banks replenish their research staffs and go hunting for new stocks to recommend.

The five companies listed below are covered by fewer than five analysts even though they have increased their sales and earnings per share by at least 10% apiece over the past year, and their shares are up nicely year to date.

Global Cash Access Holdings (GCA) earns generous fees helping casino gamblers get their hands on more cash after they've emptied their wallets. How generous are those fees? While casino partners like MGM Mirage (MGM) and Las Vegas Sands (LVS) are watching profits evaporate this year amid a travel downturn, Global Cash is expected to increase its sales by 8% and its profits by 11%. For now, the company makes most of its money operating its patented “3-in-1” cash machines. These prod customers who are denied bank withdrawals the opportunity to try their debit cards and then go for credit card advances, all in one seamless transaction (which, presumably, doesn’t feel the least bit like a Central Park mugging). Global Cash also earns smaller amounts by helping casinos determine which gamblers to lend house money to, and by telling casinos which rivals their customers have withdrawn cash from in the past. Eventually, the company hopes to replace cash machines and teller windows with a cashless system whereby gamblers simply enroll their bank accounts and credit cards. Its shares trade at just nine times earnings.

Retail has taken a beating over the past year and clothing stores are among the hardest hit. One relatively small chain that operates out of strip malls in low-income neighborhoods is prospering, though. Citi Trends (CTRN) has just over 350 stores in 22 states and explains in its financial filings that it competes against fellow discounters like TJX (TJX) and Ross Stores (ROST) by “appealing to African-American consumers and offering urban apparel products.” According to Oppenheimer & Company, its customers demonstrate a “high propensity to purchase apparel.” The chain enjoys one of the fastest payback periods in the industry — new stores earn back their upfront investment in about a year. Citi Trends’ growth potential isn’t lost on investors. Shares go for 18 times forward earnings. But the company has made a mockery of quarterly earnings estimates of late, topping them by double-digit percentages. It’s also debt-free with $3 a share in cash.

America’s Car-Mart (CRMT) sounds like just the sort of company for investors to avoid. However, it's benefitting from the dismal car sales seen at large dealerships over the past year. The company specializes in the low end of the used-car trade in states like Arkansas, Oklahoma and Kentucky. In the company’s most recent quarter, sales at longstanding dealerships improved nearly 3% and company profits rose 8%. Management used strong cash flow to pay down debt, which stands at a modest 24% of equity. In addition, stores are requiring higher down payments on car loans vs. a year ago, and late payments and defaults are down. Shares fetch 12 times earnings.

Have a look if you like at the details on these and the other two screen survivors below.

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That's a key selling point for so-called "go anywhere" funds or what Lipper tags as multicaps. These funds can invest in every corner of the stock market — and that agility seems to be paying off. According to Lipper, the average multicap fund is up 7.1% this year through Thursday. That's almost five percentage points better than the typical S&P 500 index fund and second only to midcaps when it comes to mainstream fund category performance.

This week the SmartMoney fund screen focuses on this sector, which includes 1,608 funds and share classes. We narrowed that group to 296 offerings by disqualifying load funds. In addition, we looked for funds that charged below-average fees and have top-tier three- and five-year performance track records. Their 2009 return also had to exceed that of the S&P 500. That left us with the 22 funds on the table below.

We have been keeping a close eye on this category all year for signs that it may be breaking away from the pack. When we last looked at multicaps in early March, the category as a whole was down an average 21.2%. The stock market bottomed out a few days later and has since gone on a remarkable run, gaining by more than a third. Midcaps — a category we advised you to watch two weeks ago — has been the biggest beneficiary of that rally. The average fund in that niche is up 9.2% this year. "We remain buyers of...midcaps," said Citigroup's small-cap and midcap equity strategist Lori Calvasina in a recent report. "We would use any near-term weakness as an opportunity to add to positions." Many of the managers of the top-performing funds in the table below have taken a similar position and have large exposure to that area in their portfolios.

Of course, there are some issues that arise when investing in multicap funds. Some advisors shy away from the category because they make asset allocation difficult. After all, an advisor can't accurately judge a client's exposure to, say, small caps, without knowing what the multicap fund owns (and that's only disclosed a few times a year). However, this can actually work in investors' favor, too. Many market watchers think stocks will soon experience a pullback before inevitably rebounding. Health care, technology, growth and small-cap stocks are all believed to be sectors that could outperform in that scenario. Instead of making a bet on each of those areas, investors can simply buy a multicap fund that has exposure to them all.

One interesting trend that emerged when we did our screen is that most of the funds in our table are managed by independent firms and several are family-run offerings. In honor of Father's Day, we recently spoke with several father-and-son investing teams including the men behind the Croft Value fund (CLVFX), which is run by Gordon Croft and his two sons, Kent and Russell. One secret they slipped us: Don't move with the pack. Says Russell Croft: "The search for inherent, hidden value with a contrarian nature — we got that from our father more than anything." The fund has returned an average annual 2.4% over the last decade, good enough for a top 10% spot in Morningstar's large blend category. Key holdings as of the fund's latest filing date include Weyerhaeuser (WY), Johnson & Johnson (JNJ), Deere (DE) and Cisco (CSCO). Year to date the fund is up 11%.

We would also suggest looking at Amana Growth (AMAGX), Auxier Focus (AUXFX), Becker Value Equity (BVEFX), Westport (WPFRX) and the Yacktman funds. The funds have seasoned managers, good track records and low fees — all the beginning hallmarks we look for in a mutual fund.

The Criteria: The multicap equity funds on our list are open to new money, require a minimum investment under $5,000 and charge an annual expense ratio less than 1.5%. The funds have three- and five-year track records that put them in the top 25% of their category. In addition, they're beating the 2009 return of the typical S&P 500 index fund. Finally, we did not include funds that charge a sales load.

• Fund Type = Multicap
• Annualized 3-Year Return (%) = Display Only
• Rank in Classification (%) (3 year performance) <= 25
• Annualized 5-Year Return (%) = Display Only
• Rank in Classification (%) (5 year performance) <= 25
• Expense Ratio <= 1.5%
• Load Fund (type) = No Load
• Minimum Initial Investment <= $5,000
• Open to New Investors = Yes
• Total Net Assets ($ millions) >= 50
• Year to Date Return (%) >= 2.8

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Maybe. A bit more information will make those recommendations more telling.

Finance researchers have devoted heaps of time over the past decade to judging the worth of analyst advice. That was motivated in part by scandal. The Internet stock bubble of the 1990s raised suspicions that large investment banks had published chipper research on companies to better their chances of selling financial services on the side. In April 2003, about three years after the bubble popped, 10 of America’s largest investment firms agreed to pay more than $1.3 billion to settle the matter with the Securities and Exchange Commission.

Here’s what studies have turned up so far: Buy recommendations are far more common then sells, especially in the U.S. Sell recommendations seem to hold more predictive power. One study showed that stocks with the most buys outperformed those with the most sells, but later studies found that some hidden factors explain the results better than the recommendations. Analysts tend to favor glamorous stocks -- those with rising share prices and fast-growing earnings -- just like most investors. Stocks that demonstrate that kind of momentum are more likely than not to outperform over the following year or so -- with or without analysts’ recommendations. That suggests that the level of analysts’ recommendations isn’t that useful as a predictor. (Also, it means we should pay careful attention to the study periods when reviewing analyst performance. Glamour stocks tend to outperform in bull markets, so analysts can be expected to look good then, too.)

One finding stands out as more useful, though. Upgrades tend to be followed by market-beating stock performance. In other words, what matters about the stock in my opening example isn’t that it has five buy recommendations, but whether any of them were recently changed from holds or sells. Most likely, that has to do with freshness. Some analysts revisit their recommendations only every six months or so. Standing recommendations might reflect stale opinions. Recent upgrades reflect new thinking.

Of course, investors shouldn’t blindly follow analysts without doing their own research. The five stocks below have attracted recommendation upgrades in recent weeks and have modest valuations, good dividends and strong balance sheets.

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The theory comes from a set of elegant mathematics first published in the Journal of Finance in 1952, then mostly ignored for a decade, then transformed in the early 1960s through more lovely math into a stock prediction machine called the Capital Asset Pricing Model. The formulas gave rise to the index mutual fund industry in the 1970s and earned two key contributors Nobel Prizes in economics in 1990.

One of the upshots of the math is that if you know something called “beta” for a stock, you can calculate the stock’s expected return. So what’s this remarkable beta? In theory it’s a measure of risk. In practice, risk is a tricky thing to measure, so beta is often based on a stock’s past trading volatility relative to other stocks. A stock that moved frantically in the past has a high beta today, which means it’s supposed to be risky, which means it’s supposed to earn high returns in the future. But no one wants the extra risk, so we’re all better off forgetting about stock picking and buying index mutual funds.

Indexing is probably the best thing to come out of the math. Those Vanguard funds are blessedly cheap, and since over long time periods mediocre stocks are better than no stocks, the funds are a good deal for investors who aren’t keen on stock-picking, which is most of them.

For stock pickers, the formulas don’t quite deliver as promised. Past volatility isn’t terribly accurate for predicting future returns. Other clues, when added to volatility, result in more accurate predictions. Among these are a company’s size, or what you’d pay to own all of its shares today, and its price/book value, which compares the purchase price to what accountants say the assets are worth. All else held equal, small companies and cheap companies tend to produce better stock returns. Mathematicians say this is because these clues are actually alternative measures of risk in disguise. That is, small companies are riskier than big ones, and what is cheapness if not a sign of flaws, and thus, risk? So the theorists worked these new clues into the pricing model to turn that volatility-based beta into a “three-factor” beta, but more good clues like recent share price momentum turned up soon after. They added those in, too.

I’ve lost track whether we’re up to five or six factors, but the process has become a bit circular. Every time researchers find a clue that reliably predicts good stock returns, other researchers redefine that clue as part of a new measure of risk. Do that for long enough and risk really will be inseparable from return, because the two will be different labels for the same things.

That’s a long lead-in to the subject of which stocks investors should swap into now if they feel the market has gotten expensive, and they suddenly care more about safety than returns. Risk, I’m convinced, isn’t something to be throttled back on at the expense of returns. The best way to reduce risk is to be greedy for return. That doesn’t mean placing wild bets. Sometimes it means holding cash. With regard to stocks, it means continually searching for modest valuations, big, reliable dividends, strong balance sheets and other good clues.

Below are listed five companies whose shares seem attractively priced — safe, you might say.

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