Your Best Market Bets for Profit in 2003

Industrials, Basic Materials and Energy Gain Favor

Companies making the basic building blocks for industry -- products like steel, chemicals, aluminum, paper and fuel -- tend to do better as an economy recovers. Many are getting another boost right now as the dollar weakens, shifting orders back to U.S.-based companies. A third positive is the impressive level of cost cuts they've made during the downturn. Examples of basic materials companies include Dow Chemical(DOW), Alcoa(AA), PPG Industries(PPG), Air Products & Chemicals(APD), Phelps Dodge(PD) and International Paper(IP).

Energy stocks do well in a recovery, too, but they are also benefiting from looming shortages -- particularly in the North American natural gas market. But there's a medium-term shortage building in world oil supplies, too.

Stock plays in North American natural gas (the sector has risen recently on colder-than-expected weather) include Patterson-UTI Energy(PTEN) Ensco International(ESV), Collins & Aikman(CKC) and Sanmina-SCI(SANM), say bond analysts at First Pacific Advisors.

Key Consumer Stocks Take a Hit

Consumers, of course, have kept on spending as lower interest rates have filled their coffers with proceeds from loans and better terms on home mortgages. If the economy recovers, interest rates will either move up or stop falling, shutting down the mortgage refinance spigot. These changes could hurt consumer-oriented companies -- especially those making big-ticket items bought on loans, like cars and refrigerators. Next, in a recovery, investors will flee more "defensive" companies, like those providing consumer staples and health-care services.

Third, be wary of deflation. While it won't be a risk to the overall economy, certain sectors will suffer as foreign competitors continue to produce cheaper goods. U.S.-based furniture manufacturers like Furniture Brands(FBN), La-Z-Boy(LZB) and Stanley Furniture(STLY) face risks. On the other hand, Cognizant Technology Solutions(CTSH), which uses lower-paid code writers in India to solve software problems for U.S. companies, has found a way to make international wage differentials work in its favor.

And if you've been holding high-dividend stocks to get some protection against the stock market declines, double-check the growth outlook for those businesses. Though they may benefit from more favorable tax treatment of dividends this year, companies paying strong dividends often operate in mature, slower-growing areas of the economy, and they'll be left behind if growth picks up next year.

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