James Paulsen, chief investment officer of Wells Capital Management, says the market has a ways to run, and that there are signs the economic recovery is self-sustaining — not simply driven by stimulus funding. Paulsen tells Yahoo! TechTicker that he doesn’t think the market’s rise will be a straight line upward, but he does say that he thinks we’re “very early” in the stock market and economic recoveries, and that we’ll see new highs in corporate profits before the end of this cycle.

In their latest column for Kiplinger’s, Whitney Tilson and John Heins — who were way ahead of the curve in predicting the housing crisis — say they don’t think the housing collapse is behind us.

“As much as we’d like to believe otherwise, we expect housing prices to resume their decline well into 2010,” the duo writes. “As a result, financial companies exposed to the housing sector will endure substantially higher-than-normal losses for several more years.”

While the problems caused by subprime loans are mostly behind us, Tilson and Heins say “the market for midprice and expensive homes, however, is frozen. Buyers are looking for bargains, but sellers are still focusing on the housing values of a few years back and refusing to sell at prices buyers are willing to pay. … While foreclosures of lower-priced homes are declining, they’re rising rapidly among homes in the higher ranges.”

Foreclosures would be worse if not for government intervention, they say, which is propping up prices. Tilson and Heins say that despite their concerns, they “are not predicting economic Armageddon, thanks mainly to massive government intervention.” But they say that it will take time to unwind the biggest asset bubble in history. “Thus, we see tepid growth and high unemployment for a number of years,” they write. “Of course, we hope we’re wrong, but this is the big-picture analysis we’re employing as we evaluate individual stocks.”

Tilson and Heins say they’ve trimmed more aggressive positions. They’ve also added some large-cap, cash-rich companies like eBay, Microsoft, Pfizer, and Yahoo, which they think will hold up well in a weak economy. Their least-favorite sectors: those that will suffer if, as they expect, the housing market declines later this year. Those sectors include homebuilders, bond insurers, and regional banks, they say.

In Barron’s latest Big Money Poll, about 60% of money managers say they are bullish or very bullish on the stock market through the middle of 2010, though nearly half say they think there’s a 50% or greater chance of a sharp correction in coming months.

The bullish respondents, on average, expect the Dow to climb 5% or so to 10,187 by year-end, and expect it will reach 10,771 by mid-2010, Barron’s reports. They expect the S&P 500 to reach 1121 by year-end and 1190 by mid-2010. And they are most bullish on the Nasdaq Composite expecting it to rise 15.9% to 2371 by mid-2010.

About 13% of respondents are bearish, and 28% are on the fence, according to Barron’s. The bears see stocks falling around 10% through mid-2010, They think the Dow could fall to 8776 in the first half of 2010, the S&P 500 to fall to 922, and the Nasdaq to 1823.

One notable manager interviewed for the piece is James O’Shaughnessy of O’Shaughnessy Asset Management.

He predicts the Dow will end this year at 9975. By mid-2010, he sees the Dow at 11,140, the S&P at 1200, and the Nasdaq at 2625. O’Shaughnessy also said equities could earn as much as 15% a year in the next five years, with “the junk rally ending and…high-quality stocks taking the lead,” Barron’s reports.

Bob Doll, chief investment officer for global equities as Blackrock, tells Bloomberg that he’s recently cut back a bit on some healthcare stocks and added to cyclical areas like energy. Doll also says that the economic recovery will be atypical, with slower growth and periods of doubt, but he thinks we still haven’t seen the market’s cyclical high yet.

While the market is up well over 50% since its March low, money manager John Buckingham says you can still find values — particularly in areas left behind in the recent rally.

“This a rally that has been led by the risky stuff,” Buckingham tells BusinessWeek. “Investors should be gravitating toward the names that really haven’t had a great performance in the [market] recovery.”

Buckingham says to start with large, dividend-paying companies with safe reputations. He’s buying Wal-Mart, Verizon, Lockheed Martin, and Abbott Laboratories, according to BusinessWeek.

Another top manager who sees opportunities in left-behind stocks is Russell Croft, portfolio manager of the Croft Value Fund, which is in the top 10% of performers in its category over the past three, five, and ten years, according to Morningstar. “We look at things that might not have moved [and] might not be getting as much credit in this environment,” Croft told BusinessWeek, which notes that Croft has bought Procter & Gamble and Lowe’s Companies, which are both down slightly for the year.

But Croft doesn’t rule out firms that have done well in ‘09, if they have continued growth potential. His fund holds shares of Cisco Systems (CSCO), up 45% this year, BusinessWeek says.

Dan Chung, CEO and chief investment officer of Fred Alger Management (whose Alger Funds as a whole have significantly outperformed the broader market for the past three and five years) says upside earning surprises, poor yields on cash, and the international nature of many companies will spur the stock market higher.

“We’ll see more fundamental upside [earnings] surprises in the third and fourth quarters, and the wall of cash on the sidelines” that’s fetching “terrible” yields will eventually bring more investors back to the market, Chung tells Barron’s. “A 5% reallocation from cash and short-term bonds could drive a 17% appreciation in the stock market,” he contends.

Chung also says we’ve reached “the tipping point where international business at many companies can drive growth and actually overcome weakness in the U.S.”

While Chung thinks earnings will grow by 25% in 2010, he says that it’s a stock-picker’s market that could be range-bound. Potential headwinds — the end to easy year-over-year earnings comparisons and the winding down of the stimulus funding — could pop up in the second half of 2010. But Chung adds that “investors will make money from here.”

Currently, Chung is particularly high on the personal computer industry, and on chip makers that benefit from increasing wireless connectivity, Barron’s reports.

MarketWatch’s Mark Hulbert says that, while the market has continued its upward trend in the past few months, sentiment remains quite low among market-timers — and that’s good news for stocks.

As of Thursday, the shortest-term market-timers tracked by Hulbert’s Hulbert Financial Digest, on average, recommended that investors be 19.4% in stocks. “Though that may strike you as surprising, it is precisely what contrarian theory would suggest: The bull market is climbing a wall of worry,” Hulbert writes.

In addition, Hulbert says the last time that the average recommended equity exposure among those newsletters was as low as it is today was in early July, when the Dow Jones Industrial Average was almost 2,000 points lower than recent levels. “That’s amazing, because the usual pattern is for advisers to become more optimistic and exuberant as the market rises, just as they tend to become more dejected and pessimistic as the market declines,” he says. “In other words, the bull market since July has had no net impact on the sentiment among market timers. Call it a stealth bull market, if you will.”

Hulbert says data shows that advisers have upped their equity stakes begrudgingly during recent months, and have been quick to bail on stocks at the first sign of trouble.

For example, during a mini-correction that started a few weeks back, the Dow dropped 3.3%, but the short-term timers decreased recommended equity exposure by more than half, Hulbert says. “Such eagerness to get out of stocks in the face of only a modest pullback is an indication of just how strong the wall of worry is right now,” he says. “And it suggests that the sentiment winds continue to be blowing in the direction of higher prices.”

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In an interview with CNBC, GAMCO’s Mario Gabelli says the way to make money in a fairly flat market is by going back to “plain ol’ stock picking” — and says that the “new normal” will look a lot like the old normal.

“It’s not the new normal — it’s the way it used to be” until the financial sector blew up, Gabelli says. He adds that he expects “the strong will get stronger,” citing firms like Goldman Sachs and JPMorgan. And he also is on the lookout for companies that will go through what he terms “financial engineering”. (Thanks to valueinvestingpro for posting this video.)

In the past two days, two of the most successful gurus I follow — GMO’s Jeremy Grantham and Gotham Capital’s Joel Greenblatt — have said that they are seeing a lot of value in “high-quality” stocks, as opposed to the junk-type stocks that have led the recent market surge.

In his third-quarter letter, Grantham says that U.S. “quality stocks (high, stable return and low debt)”, are now trading at “genuine outlier levels” compared to the rest of the market after the junk rally. “In our seven-year forecast the quality segment has a full seven-percentage-point lead over the whole S&P 500, or 9% over the balance ex-quality,” he says.

Greenblatt, meanwhile, told Yahoo! TechTicker that his “magic formula” approach seems to be finding more values in high-quality stocks than in junk-type stocks

With Grantham and Greenblatt’s comments in mind, I scoured my database for stocks that pass one or more of my “Guru Strategies” (each of which is based on the approach of a different investing great), and which could also be considered “high quality”, using Grantham’s definition as a basis. Among the specific criteria I used to define “high quality”:

• earnings per share have increased in each year of the past five-year period, with average annual EPS growth of at least 10%;
• a current ratio (current assets/current liabilities) of at least 2.0, to target stocks with good liquidity;
• debt/equity ratios no greater than 40%;
• market caps of at least $250 million, and share prices of at least $10, to focus on better-known firms.

Here are ten of the top stocks that meet all those criteria:

Hedge fund guru Joel Greenblatt says that he thinks the best values in the stock market are probably now in the “high-quality” area, as opposed to the junk stocks that have led the recent rally. And, he says he’s not too concerned with potential inflation — or deflation, for that matter.

Greenblatt, who uses a purely quantitative formula to pick stocks, tells Yahoo! TechTicker that he doesn’t like to predict where the broader market will go. But he does say that stocks with poor fundamentals got hammered last fall and in the early part of 2009, and have then surged back during the rally. Higher-quality stocks, meanwhile, fell less during the plunge, and have risen less in the rebound. “A lot of those are available at attractive prices,” he says of the latter group.

Greenblatt’s two-step “magic formula” is a value approach that often delves into unloved areas. “What you’ll find is that [the formula] comes up with companies that people always think there’s a problem with,” he says. Investing in one or two of these firms is thus risky. But if you buy a broader portfolio of them, the risk is dispersed. “That’s why you really have to buy a basket of 20 or 30,” says Greenblatt

Currently, Greenblatt says his strategy is finding value in construction & engineering and retail stocks. It’s also high on McGraw-Hill.

Greenblatt also offers an interesting take on macro-economic assessments. Because of its long-term nature — he says long-term investing is three to five years and “hopefully ten” — he says his strategy doesn’t look at macro factors. Over longer periods, economic problems “play themselves out”, he explained. And, he says stocks can generate strong gains in a variety of climates. During inflationary periods, for example, they offer great protection, he says, but good companies also aren’t bad places to be during deflationary climates.