(FORTUNE Magazine) – Harry Zisson, 47, doesn't look for a terribly exciting economy over the next 12 months. The dollar's depreciation will help exporters, he says, and the tax bill should stimulate the economy somewhat. He sees inflation rising moderately, to between 4% and 5% next year. With this in mind, Zisson chose a portfolio reflecting a shift away from the financial, food, and beverage stocks that led the market's earlier advance and toward more economically sensitive shares with antiinflationary characteristics. Among Zisson's favorites are natural resource companies. He notes that the high-technology industry has had its own bear market since 1983. ''We think that's another area that has moderate risk and should start breaking away from the pack,'' he says. Zisson is holding about half his Challenge money in reserve. A big cash position is the only similarity between this year's Thomson McKinnon portfolio and last year's, which was managed by Cary Retlin, vice president of portfolio strategy. The firm finished in fifth place. You've picked Chevron. Isn't a big oil company still a daring bet? We've liked Chevron for some time. I think the oil group offers only modest risk because the price seems to be stabilizing, at roughly $15 to $18 a barrel. Obviously if oil goes down to $8, all the companies would have some problems, but we don't see that as likely. Chevron has incorporated the Gulf acquisition very smoothly. The company also has plenty of low-cost reserves, so it can operate profitably even with prices down. Plus, Chevron has added to its reserves, which means it's planning for the future. It should earn well over $4, maybe $4.50, a share, so the $2.40 dividend is protected. What made you choose Union Pacific? We thought this was an extremely well-run railroad. It has good diversification in real estate, uranium, coal, and oil and gas reserves. And it's moving into trucking with a big acquisition (Overnite Transportation, for $1.2 billion). The company has written off almost $1 billion of its disappointing operations. All this shows management is genuinely interested in improving shareholder returns. We think Union Pacific should earn over $4 a share this year and well over $5 next year. With a good balance of natural resources, the stock should command a high multiple in a period of moderate inflation. You've also selected Goodyear, the dominant U.S. tire company. Is it the company or the industry that you like? We think there's a good buy here. The stock sells for around book value. Perhaps our main consideration is a pickup in the replacement-tire end of the business. Two reasons: Auto sales over the past three or four years have been very substantial, and low gas prices have meant more driving. Goodyear has benefited from the dollar's drop. What's more, we think the stock is moderately valued, selling at around 12 times earnings based on next year's estimates.

What about E-Systems? It's kind of tough to get a handle on much of what E-Systems does. The company is a defense contractor, and many of its projects have security labels. Consolidation has been going on in the defense electronics business since Lockheed took over Sanders Associates (for $1.17 billion) a few months ago. I think increased takeover speculation will drive up earnings multiples in the whole industry. Also, the Pentagon is forcing the industry to be more efficient. Small and medium-size companies are no longer able to stick the Pentagon with every overrun and excessive cost they incur. E-Systems has a backlog of about $1.6 billion, quite large in relation to revenues of about $1 billion. It has major programs in the works for the defense establishment, including Star Wars, and we think its earnings can grow at about 15% a year. The share price of $35 is around 14.6 times our projected earnings of $2.40 for 1987. We see the stock selling for 15 to 20 times earnings by next year. How about your other defense stock? Sparton Corp. is a tiny company with about $250 million in sales that is not well followed on Wall Street. But we like the way it came back from disappointing results a couple of years ago. Among other things, the company makes antisubmarine warfare devices. That's an area that shouldn't be hurt by defense cutbacks made to balance the budget. Backlogs are very strong. The company has virtually no long-term debt. Earnings should be about $1.85 a share in the fiscal year ending next June, vs. $1.14 this year. At around $18, the stock is very reasonable and only moderately risky. What draws you to the pulp and timber field? It fits in with our view that natural resource companies are a good hedge against inflation. Pope & Talbot is very small and sells at just around book value. I think the prospect of strengthening lumber values is going to help the price of the stock. The company is diversifying into the consumer market with paper tissues. It has also taken some major modernization steps to increase efficiency, so profit margins should start improving. And at $20 a share, I'd say the stock is quite reasonably priced. Earnings should easily exceed $2 next year. And International Paper, the industry leader? When you're looking at this stock or Pope & Talbot or Union Pacific, you're thinking about the market value of the assets -- which is likely to rise with inflation. International Paper, which should earn $4.50 to $5 a share next year, is certainly not overpriced. Standard Brands Paint seems very different from these other picks. What's the attraction? Generally speaking, the retail group has performed very well in the stock market over the past few years. But this California retailer of paint and home-decorating products never really participated in the rally. It has been up against quite a lot of competition. Yet it has an impressive balance sheet and lots of cash -- about $17 million, which is about half as much as its current liabilities. The management has taken steps in the last couple of months to get out of commodity products and bolster earnings. It is now buying back up to 750,000 shares, about 6% of the outstanding stock. The company should earn about $1.45 in the fiscal year ending in January, and perhaps $1.70 next year. Do you think it's a takeover candidate? Obviously management thinks so, or it wouldn't be buying back all that stock. Norton is also restructuring, isn't it? And we think it has done a very good job. The company really started in 1985. The effort was to lower operating costs, and I think we're just on the verge of seeing the results. Earnings should pick up nicely, from around $3 this year to between $3.50 and $4 next year. From Wall Street's standpoint, the stock has been a stodgy performer. But considering that the company makes oil field and mining equipment, its earnings have done fairly well. Norton has some products coming onstream, such as ceramics for coating piston rings, that could give it a high-technology aura it has never had before. What is ONEOK? It's the old Oklahoma Natural Gas, an intrastate pipeline company. It's obviously in a very depressed location, but we think the worst is over for the energy belt. This is probably the least dynamic stock we have. But it has very modest risk, and it yields over 8%. That's better than we could get in a money fund. We like to have some exposure in a very depressed area, if only because there's nowhere to go but up.

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