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If the

Federal Reserve stops raising interest rates in June, technology stocks should rally. If the bankers take on another 25 basis points in June and then step aside in August, technology stocks should rally. If the economy slows but not too much, technology stocks again should rally.

In fact, in most scenarios that I can imagine -- an exception being if growth really, really slows -- technology stocks should outperform the market.

Health, Wealth and Oil

But that doesn't mean that this group of stocks is the only sector that has that potential. Or that indeed, some sectors might not even outperform technology shares if growth slows enough to make investors really nervous about earnings. I can think of three other sectors right now -- the financials, the drugs and the oil drillers -- that might deserve a place in your portfolio.

The three sectors have relatively little in common and, in fact, if they do wind up outperforming the general market, each sector will do so for a very different reason. That's one of the things that makes stocks in these groups particularly attractive additions to a portfolio right now. Each sector is likely to dance to its own independent tune and could buck the trend of the general market. Besides the possibility that each could perform well, these three sectors have added value: They bring substantial diversification to a portfolio and help to lessen an investor's risk.

For each of the three, I'm going to list the general theme that makes me like the sector, then suggest a few names that would deserve consideration for your portfolio. At the very end of the column, I'll add one of those stocks to

Jubak's Picks.

Drug stocks -- because they're the traditional safe haven when investors worry about growth. Come slow growth or no growth, people buy the medicines they need. That makes earnings at the big drug companies reassuringly reliable. So reassuring, in fact, that this group is likely to do the best of the lot if investors start to worry about economic growth in the second half of the year, and if earnings growth should start to look as if it could falter in the third and the fourth quarters. Purely defensive plays to take advantage of those worries would be

Pfizer

(PFE) - Get Report

, especially now that the merger with

Warner-Lambert

(WLA)

has been approved, and

Merck

(MRK) - Get Report

.

But my pick in this group would be

Eli Lilly

(LLY) - Get Report

because it combines that attractive stability in an earnings downturn with what strikes me as the best potential for earnings growth in the group. Lilly should be able to get 18% to 20% earnings-per-share growth out of its current products over the next few quarters. But it's the company's pipeline of potential drugs that really excites me. Lilly feels so positive about drugs -- for osteoporosis, erectile dysfunction, cancer and depression -- now in late-stage trials that it is planning to increase its sales force to 4,000 by the end of this year, from 2,300 in 1999. Recent delays at Merck in its second-generation depression drug, Neurokinin 1, have also recently increased the prospects for Eli Lilly's three depression medicines: a reformulation of Prozac, a second-generation drug Duloxetine, and Zypzac, a combination of Prozac and Zypraxa. I think a reasonable short-term target for the stock is 95 by December.

Financial stocks -- because they're just so darn cheap. Sure, we know that trading volume is down on the stock market, cutting into commission revenue at every brokerage firm in sight. We know that the bear market in technology stocks has pretty much put an end to the market for IPOs and the lucrative fees they bring to investment bankers. And we know that high interest rates will cut into bank revenues as customers cut back on borrowing and find it a little harder to pay back their loans. But that's just the point -- we know all that, and the stocks' prices largely reflect those grim realities. For example, look at

Chase Manhattan Bank

(CMB)

.

Donaldson, Lufkin & Jenrette

recently calculated that at $50 a share (the price on May 18, when the brokerage firm published its analysis), the stock market was valuing the bank's venture-capital division,

Chase Capital Partners

, and its portfolio of Internet and technology stocks at $0.

Since then, the market has driven Chase Manhattan stock to a little below 48 a share. Granted, the bank faces some tough comparisons in the last half of 2000 with the great numbers posted in the last half of 1999. But the bad news would seem to be in the stock. I'd say the same about

E*Trade Group

(EGRP)

, currently a deeply depressed Jubak's Pick. The stock has been hammered down to 18 on the drop in trading volume in 2000, but the company is still on track to take the top spot for number of online accounts among online brokerage firms away from

Charles Schwab

(SCH)

in the September quarter.

And if you're looking for an even deeper discount, take a look at

Bank One

(ONE) - Get Report

. Jamie Dimon, once the heir presumptive at

Citigroup

(C) - Get Report

, took over the deeply troubled bank in March. Turnarounds take time, of course, and the company is projected to show a 24% decline in earnings per share in 2000. But Dimon has a track record that makes eventual success likely. And at a recent price of just below 29, the stock was trading for just 11 times those depressed, projected 2000 earnings and also paying a dividend of almost 6%.

Oil drilling stocks -- because no one has built a new deep-sea drilling rig in two years. I don't expect the price of oil to stay in the current range of $30 to $33 a barrel. This week's

Organization of Petroleum Exporting Countries

meeting is likely to mark the first step in the descent back to $25. But that's OK. With crude anywhere north of $20, it's worth it for producers to increase their budgets to drill for new oil, and that will mean higher rates as producers compete to lease the limited supply of existing drilling rigs and drilling platforms. The market has already factored some of this news into the price of drilling stocks. Shares of one Jubak's Pick,

Global Marine

(GLM)

, for example, have appreciated almost 60% in 2000. But most drilling stocks are still trading at about the same price they reached in mid-1999, when investors first began to anticipate a turnaround in the sector.

Diamond Offshore Drilling

(DO) - Get Report

, another good example, traded at 30 a share in June 1999 and traded recently at 36. I think stocks in this sector have another 50% spurt ahead of them in the next few quarters. Especially attractive to me, besides Global Marine, are

Rowan Companies

(RDC)

and

Transocean Sedco Forex

(RIG) - Get Report

, both firms specializing in deep-ocean drilling.

The Time Is Right for Only One

When would I buy stocks in these three sectors?

I'd wait a bit on drug stocks. The sector has recently moved in almost-perfect opposition to technology stocks. When investors feel confident about growth, they pile into the tech sector. When they feel a bit nervous, they move back toward drug stocks. A solid rally in technology stocks in the next few weeks might knock a few bucks off the price of Eli Lilly. I'd be a buyer of shares at 83 or less.

I'm also inclined to wait in the financial sector right now. The stocks are thoroughly hated, it's true, but I think earnings projections are still likely to take a hit or two when the June quarter is reported. Some companies are likely to warn about business in the third and fourth quarters as well -- after all, we won't see easy comparisons until 2001. I'm inclined to wait in this sector until later in the summer, just to make sure that I've minimized the chance of nasty surprises in the group. Among the financials, my first choice -- after E*Trade, which is already in Jubak's Picks -- would be to buy Chase Manhattan at 50 or less with a target of 75.

On the other hand, I'd buy oil-drilling stocks today, and in fact I'm going to add Transocean Sedco Forex to Jubak's Picks with a target price of 70 a share by March 2001. That will give me three picks --

Schlumberger

(SLB) - Get Report

, Global Marine and Transocean Sedco -- in the energy sector.

Long Term Vs. Short Term

Thinking about this column and thinking back to my last column on

Citrix Systems

(CTXS) - Get Report

and

Qualcomm

(QCOM) - Get Report

has reminded me of a question I raised more than a month ago. We're all short-term investors now, I wrote then. Those of us who used to think about the long term had in mind five years or more. Now, many of us who still think of ourselves as long-term investors are talking about a year or 18 months. Jubak's Picks, as I noted a month ago, was started as a short-term portfolio, but in this market, my holding period of 12 months to 18 months seems positively quaint. Doesn't that mean, I asked, that there might be a profitable advantage to be gained by thinking long term in a short-term market?

I don't think it pays to ignore the short term in such a market, especially when it comes to trying to control risk. It's the short-term mistake that can blow up a stock in this market. But I think there's a way to build a long-term perspective into a portfolio for this market that doesn't ignore short-term risks or gains, either. And that's the topic of my next column.

At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: America Online, Charles Schwab, Citrix Systems, E*Trade, Global Marine, Wind River Systems and WorldCom. He welcomes your feedback at

mctsc@microsoft.com.

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