Investors looking to go against the Wall Street grain should look to companies that are in the midst of change, Beth Lilly, portfolio manager at Gamco Woodland Small-Cap Value Fund, told CNBC Thursday.
We look for companies with some kind of change going on, whether it is a new management team, the deployment of a new financial strategy or the introduction of products into a new market, Lilly said.
That's a dynamic that Wall Street does not appreciate, she said.
"We also look for companies that are excellent capital allocators… We look for strong management teams and we look for companies that have the correct incentive and compensation structures," Lilly told "Squawk Box Asia."
The fund invests in companies that will create value "regardless of what is going on in the overall economy," Lilly said.
Stocks Lilly likes include Constellation Brands , Deluxe Corp. , Lawson Software and ACCO Brands .
"Constellation Brands (is) a wonderful wine company and you're buying the company today for $15 and getting their beer business for free," Lilly said. "It's a company that has been run by the Sands family for many years … and they decided to hire a new CFO and this new CFO has come in and he is helping them get financial discipline. So you're seeing a focus on operating margins, you're seeing a focus on return of invested capital, you're seeing a desire to pay down debt."
"Wine grows with the economy," she added.
In addition, investors are returning to the health-care sector as the health-care reform takes shape, according to Lilly.
"There are wonderful health-care companies that are growing their revenues, growing their earnings, expanding their margins, buying back stock. And we just think the health care sector is going to offer great opportunity. Not to mention we think there is going to be a fair amount of mergers and acquisitions activity in the health care sector this year," she said.
"Deleveraging still needs to occur as the economy is in what we call a 'balance sheet recession' in a sense that the government has created free money but nobody is borrowing money and the people that can borrow money don't want to borrow money," Lilly said. "Asset values are coming down and so what you're seeing as assets are not as valuable and on top of that, the smaller companies' balance sheets that are impaired can't get the credit."
"The economy is in for some very tough sledding over the next six to nine months," Lilly predicted.
CNBC Data Pages:
Gamco Woodland Small-Cap Value Fund has no company holding in any of the companies mentioned. However, Beth Lilly has a personal holding in all of the companies mentioned.