Q: Which sectors look most attractive? A: We like and own Telefonica [TEF], which is based in Spain, but is one of the world's leading telecom companies. It has significant operations not only in Spain but across Europe, and a good business in Latin America. It also has a good mix of fixed and wireless assets. The stock has been under pressure because of concerns about the slowdown in the Spanish economy. One area that bears mention, however, is the company's exposure in Venezuela. This is a profitable business, but with obvious political and currency risk. But Telefonica management is one of the best in the industry, with a consistent track record of growing the dividend. The current yield exceeds 6%. Moderate-single- digit growth in net income, together with share buybacks, should enable the high- yielding shares to produce a solid total return in the next several years.

Q: What else interests you in the sector? A: China Telecom [CHA] has had a nice recovery after being hit pretty hard last year. The company has made a positive start in recruiting subscribers to its newly acquired CDMA mobile business. The market has become more comfortable about the prospects for turning around the mobile business, which would augment the value of the stock. It is trading largely on the value most people attribute to the company's fixed-line business.

Q: What about big positions in health care? A: Our weighting in pharmaceuticals is the heaviest in 20 or 25 years. Novartis [NVS] is a big position. It is a bit of a different animal than some of the pure pharmaceuticals, given 30% of its total business is non-pharmaceuticals, mainly generics and products aimed at consumer health, animal health and vision care. Based in Switzerland with operations globally, the company reported revenue of $41.5 billion in 2008. The stock is undervalued because investors are focused on short-term issues confronting the company and the industry. The shares have been depressed this year by unfavorable currency movements, manufacturing issues in the generics division, and worries over the shape of U.S. health-care reform. In addition, investors have been selling defensive stocks to fund purchases of economically sensitive companies.

Q: You own Cisco, too. How is it doing? A: We've always liked Cisco Systems [CSCO], the world's leading supplier of networking equipment. It had $39.5 billion of revenue in fiscal 2008, ended July. However, it rarely has sold at a valuation level that meets our criteria. The price/earnings multiple peaked above 100 times in 2000, and currently rests at 14 times fiscal 2009 forecasts. The free-cash-flow yield is 11.5%, based on fiscal 2008 earnings. The stock is undervalued as investors worry about...economic weakness, and underestimate Cisco's ability to benefit from secular trends in video conferencing, wireless data and streaming video. All will require continued investment in Internet and networking infrastructure.

Q: Templeton owns media stocks, which have few fans these days. What appeals to you about these businesses? A: A number of media companies in Europe and the US. have valuation characteristics similar to the tech and other stocks we've been talking about: undervalued cash flow and good balance sheets. They were leaders in the TMT [telecom-media-technology]-bubble cycle of the late 1990s, but have recovered and rectified the imbalances in their valuations. We have a fairly significant position in Vivendi [VIV.France], which provides us with exposure to the telecom as well as the cable area. The stock is out of favor due to investors' dash for cyclicality, but the valuation is extremely cheap. The company trades for eight times 2009 estimated earnings, has a 12% free-cash-flow yield, a well-supported 7% dividend yield and a strong balance sheet. If you strip out the value of its listed stakes in Activision Blizzard [ATVI] and Maroc Telecom [IAM.Morocco], and benchmark SFR [a French mobile-phone company] against telecom peers, that leaves the rest of Vivendi's media assets [Canal+, Universal Music Group and NBC Universal] at just 2.5 times 2009 earnings. Comparative media franchises are trading at seven to eight times earnings.

Q: Templeton owns media stocks, which have few fans these days. What appeals to you about these businesses? A: A number of media companies in Europe and the US. have valuation characteristics similar to the tech and other stocks we've been talking about: undervalued cash flow and good balance sheets. They were leaders in the TMT [telecom-media-technology]-bubble cycle of the late 1990s, but have recovered and rectified the imbalances in their valuations. We have a fairly significant position in Vivendi [VIV.France], which provides us with exposure to the telecom as well as the cable area. The stock is out of favor due to investors' dash for cyclicality, but the valuation is extremely cheap. The company trades for eight times 2009 estimated earnings, has a 12% free-cash-flow yield, a well-supported 7% dividend yield and a strong balance sheet. If you strip out the value of its listed stakes in Activision Blizzard [ATVI] and Maroc Telecom [IAM.Morocco], and benchmark SFR [a French mobile-phone company] against telecom peers, that leaves the rest of Vivendi's media assets [Canal+, Universal Music Group and NBC Universal] at just 2.5 times 2009 earnings. Comparative media franchises are trading at seven to eight times earnings.

Q: Is Vivendi your largest media holding? A: Our largest holding is Comcast [CMCSA]. It had been hurt by investor concerns about the company's use of cash flow for capital expenditures to build out its broadband network. But those concerns are receding as capital spending has slowed and penetration has reached high levels. Comcast has strong free cash flow, which now can be used for shareholder returns. The company looks undervalued on a number of measures. On 2009 and 2010 estimated EV/Ebitda [enterprise value to earnings before interest, taxes, depreciation and amortization], it trades for 4.9 times and 4.7 times, respectively. This is at the extreme low end of the historical range, going back to 1991. It's more than two standard deviations below the average of about nine times [excluding the TMT-bubble highs], and looks cheap relative to the market. Historically, cable stocks haven't looked cheap on a P/E basis. But as growth slows and margins expand, this is changing. Comcast is trading at 13 times and 11 times consensus 2009 and 2010 earnings estimates. The dividend yield is a modest 1.9%, as a payout was put in place a year ago. But dividends could grow nicely in coming years.

We are more circumspect on banks but like JPMorgan Chase [JPM] and Bank of New York Mellon [BK]. Investors still need to be careful, especially given the sharp run-up some of these stocks have had in the past few months.