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When we last spoke to Jerry Jordan, manager of Jordan Opportunity (JORDX), he was bearish on the economy’s long-term prospects and bullish on oil-levered names. What a difference a year makes. This time around Jordan explains why he exited all his energy positions and why investors should bulk up on what he refers to as “black-and-blue chips.”

What’s your outlook for the economy and market?

US gross domestic product (GDP) should grow 1 to 2 percent in the second half of 2010 and another 1 to 2 percent in 2011. The economy grew faster than it should have, mostly because of inventory replenishing; consumers and businesses stopped spending for three to six months at the height of the panic, but outlays picked up as confidence returned.

If you’re looking for positives, the US lacks the excess inventories that could supercharge another rollover in the economy. At the same time, the current environment doesn’t provide much room to build inventories, so there aren’t many catalysts to rev up GDP growth.

The US economy will be in a malaise for some time. Don’t get me wrong, GDP will expand--it just won’t feel that way for the average American.

That being said, the stock market is oversold right now. I raised a lot of cash in March and April and have put most of the proceeds to work. The pullback offered opportunities to buy into names whose valuations became stretched in March and April.

The table is set for a solid second half and a rally in the stock market. Seasonally, now is a good time to own stocks. And we’re heading into the third year of the presidential cycle, by far the strongest time for stocks over the four-year period; the administration usually pulls out all the stops in the third year to make the push for next year’s presidential election.

But investors shouldn’t overlook the many challenges on the horizon. Europe could slide into recession, and China’s economy continues to slow.

The Chinese are playing the same game they’ve played for over a decade, aggressively stocking up on commodities when the prices are low. This bolsters commodities markets for a few years, until everybody looks at the charts and decides to pile in. Then China backs off because of elevated prices.

In the past, demand outside China was sufficiently robust to provide some cushion--that’s no longer the case. GDP growth in China, India and Latin America will slow but remain positive, setting the stage for weaker commodity prices.

Don’t worry, lower energy prices are a positive. Weaker oil prices will hurt producers such as Apache Corp (NYSE: APA) and Occidental Petroleum Corp (NYSE: OXY) but help Wal-Mart Stores (NYSE: WMT) and its customers immeasurably.

The US economy resembles a market-neutral hedge fund. Critics complain that the US relies too much on imports and the consumer-discretionary sector. When conditions are good, energy prices and interest rates go up, cooling the economy; when conditions worsen, energy prices and interest rates decline--a huge benefit to consumers.

Other economies lack the same degree of offsetting benefits from interest rates and oil. Europe, for example, doesn’t suffer as much from higher oil prices, and lower oil prices don’t provide much of a boost, either. Of course, the US economy is prone to overshooting on the upside and downside.

However, near-term rally aside, economic growth will slow globally.

How has your outlook for slower economic growth shaped the portfolio?

Going forward, huge earnings growth will be harder to come by. I’m focusing on companies that have room to pull a rabbit out of a hat through share buybacks, special dividends, Dutch tenders, new product launches or accretive acquisitions--the sort of events that can be real catalysts for stocks that trade at 11 times earnings.

I call these companies the black-and-blue chips. A decade ago, Coca-Cola (NYSE: KO) traded at 40 times earnings, Microsoft Corp (NSDQ: MSFT) traded at 50 times earnings and Cisco Systems (NSDQ: CSCO) was at 60 times earnings.

Back then, investors thought these stocks had room to head higher; today, these names trade at 11 to 12 times earnings, and many question why you should own them.

These names are buying back shares at 11 times earnings, and their balance sheets are in incredible shape. A lot of investors emphasize the strength of corporate balance sheets these days, but the picture changes dramatically when you take the 200 biggest companies out of the mix. Not only are Microsoft and Coca-Cola sitting on piles of cash, but households and businesses will still upgrade their computers in a slow economy. And few consumers will stop drinking coke because US GDP expanded only 1 percent.

In an environment where I expect the S&P 500 to grow compounded earnings at a 6 percent annual rate, profit growth of 10 to 11 percent will stand out.

In the early to mid-1990s, Coca-Cola traded at a huge multiple despite growing earnings at an annual rate of 17 to 18 percent. The shares trade at 14 to 15 times earnings at present, and that multiple could easily surge to 20 over the next 18 months. It’s not a sexy story, but it wasn’t a sexy story in 2006 when the stock went from 40 to 65 in a down market.

Meanwhile, Microsoft is in the midst of the biggest upgrade cycle in the company’s history, but the stock remains oversold.

I see you still have some exposure to the consumer-discretionary sector. What the story there?

Consumers will still spend money, but the savings rate will grind slowly higher. Only terrible news would prompt savings to jump to 8 percent. But I wouldn’t be surprised if the savings rate went from 5 to 6 percent in 18 months.

We own Family Dollar Stores (NYSE: FDO) and Dollar Tree (NSDQ: DLTR), positions that align with our economic outlook. These stocks are cheap and should continue to benefit; although consumers’ fear has abated, most households will favor retailers that offer a value proposition.

We also own two clothing companies, Phillips-Van Heusen Corp (NYSE: PVH) and Warnaco (NYSE: WRC). Both firms sell affordable clothes that the average person would regard as slightly more fashionable than the fare at The Gap (NYSE: GPS). Cotton prices appear to have peaked--a huge tailwind going forward--and both firms have huge opportunities in emerging markets. Better yet, the stocks are massively oversold.

Last time we spoke you were bullish on oil-levered stocks. You’ve pared back the fund’s exposure to this sector considerably. What was the impetus behind this move?

We don’t own any energy stocks at this point. The 10-year bull market in energy is over. That’s not to say oil is going back to $25 a barrel; we think oil could be range-bound between $50 and $100 a barrel for the next 10 to 15 years. Investors will be able to make money in energy for some periods, but the sector will give it back in subsequent years.

The portfolio includes a few gold names, but that’s not really a commodities play. We own a few agriculture-related names, though we sold our position in fertilizer giant Mosaic (NYSE: MOS) in mid-April for a good profit. We’ll probably cycle back into the fertilizer names at some point.

Investors should consider rotating into names that will benefit from increasing global demand for food. The food bull market is where the oil bull market was in 2001 and 2002; massive secular trends are taking shape that will increase food prices fivefold over the next decade.

We’re playing this emerging trend through positions in iPath Dow Jones- UBS Grains Subindex Total Return (NYSE: JJG), an exchange-traded note that offers exposure to corn, soybeans and wheat. We also have a small stake in Deere & Company (NYSE: DE).

What are the motives behind the fund’s sizable allocation to health care? What’s the growth story there?

We’ve been adding to positions in names that produce life-science tools, a niche that offers exposure to the marginal improvement we’re seeing in industrials.

Budgets for research and development (R&D)--a key market for the group--should hold up fairly well. A lot of industries are adopting these metrology instruments; for example, the Food and Drug Administration started buying this equipment. Remember tainted milk in China? Such scares are prompting companies to closely analyze food products for contamination. These new markets won’t result in a huge boost in demand but could account for 1 to 2 percent of revenue growth.

And these stocks are incredibly cheap. Thermo Fisher Scientific (NYSE: TMO), for example, can grow earnings 12 percent annually for the next three years. But the stock trades at its second-lowest multiple in 20 years— the lowest was a year ago. We see plenty of room for this multiple to expand.

Thermo Fisher Scientific, along with Microsoft and Coca Cola, is a name that should have held up better than it did in the recent selloff. Part of this weakness stems from the dollar’s strength; these names all benefit from a weaker dollar. If the US dollar has reached its peak and begins to slide lower, comparables for the next year become a lot easier, especially in the fourth quarter. In that environment, shares of Thermo Fisher Scientific could go from 50 to 70.

Disclosure: No positions

Source: Black-and-Blue Chips: A Conversation With Jerry Jordan