(FORTUNE Magazine) – THE stock market may head up or head down or just muddle along, but at any given moment some industry groups are outperforming the market averages. Putting together interviews with Wall Street economists, research analysts, and portfolio strate- gists, FORTUNE has identified eight industries that show unusual promise of doing better than the field during the next 12 months. Last year FORTUNE picked the following industries as promising for 1986: defense and space electronics, waste disposal, cable TV, health maintenance organizations, drugs, regional banks, computer-aided design and engineering, and circuit boards. HMO stocks grew less robust as competition heated up, and circuit board manufacturers shorted out as the computer slump persisted. But the other groups generally thrived in the bull run-up. Marion Labs, one of the companies highlighted in the drug group, doubled in value. Waste Management, a leader in waste disposal, rose as much as 95%. FORTUNE's best bets for the next year (in random order): BIOTECHNOLOGY. This much-touted industry is poised for a breakout, analysts and strategists say. The Food and Drug Administration has speeded up its approval timetable for potentially lifesaving biotech products. At least four important drugs came on the market in the past year, and a half-dozen more approvals are expected in the next six to 12 months. The most significant will be t-PA, a new drug for treatment of heart attacks, developed by Genentech, the industry leader. ''When that happens, Genentech's stock will double and this group will explode,'' says Peter Drake, Kidder Peabody's biomedical technology analyst. He estimates t-PA will generate over $800 million in annual sales for Genentech by 1990. (For a less bullish perspective on Genentech, see ''Why Investors Make the Wrong Choices,'' page 63.) After some initial skepticism, most of the big drug companies are rushing into biotechnology. Institutional ownership of biotech stocks is increasing too. Currently institutions own 24% of the stock of 25 companies that make up Kidder Peabody's Biotechnology Index -- up from 11% a year ago. But most of the institutions are taking small positions. Says Drake: ''More money managers are putting their feet in the water, and they will add to their holdings as they become more comfortable.'' While many biotechnology stocks still trade at high price-earnings multiples, Drake thinks they remain undervalued in view of the potential markets for the drugs that are nearing approval. Drake avoids new issues and focuses on companies with products that are well established or highly visible in the pipeline. His model portfolio would include at least one leading company in each of the four major sectors of the industry: therapeutics, diagnostics, animal health care and agriculture, and laboratory equipment. Among the therapeutic drug companies -- the most important group -- he picks out Genentech, Amgen, and Cetus. Amgen's flagship product is EPO, a hormone that controls red blood cell production and is used to treat a variety of anemias. The company has four other drugs nearing approval. Cetus has several promising cancer treatment drugs in the approval mill, including the highly publicized Interleukin-2. In other sectors Drake likes Centocor, a leader in the development of diagnostic products for cancer and cardiovascular disease; Molecular Genetics, which should have three new animal vaccine products approved in the next six months; and Applied Biosystems, the leading manufacturer of automated instruments for biotechnology research. GOLD MINES. The sleepy gold markets came alive over the summer. The price of gold bullion jumped from around $340 an ounce last June to over $400 an ounce in September. Concern that South Africa's race problems might disrupt production -- it supplies 55% of the non-Communist world's gold -- has helped fuel the rally. Precious metal analysts, many of whom believe such worries are exaggerated, point to more fundamental factors. The dollar has been declining in value for over 18 months, but gold only recently started to respond. ''Foreign capital got crucified because of the dollar's decline,'' says Andre Sharon, an international portfolio manager at Simms Capital Management. He says foreign investors, who have traditionally driven the gold bullion market, belatedly began moving money out of the dollar and putting some of it into gold. Renewed fears of inflation, fed in part by the dollar's decline, also lifted gold prices. Japan, Australia, and the U.S. are all minting new gold coins this year. For its coin alone, Japan may buy some 600 tons of gold -- an amount equal to South Africa's annual production. Some investors store gold coins or bullion, but analysts say you can get more leverage buying gold-mining shares. The number of gold mutual funds, which eliminate the need to follow individual gold stocks, has jumped from half a dozen in 1982 to at least 25 today. Yet the river of cash flowing into mutual funds over the past few years has so far largely passed the gold funds by. Asks John Brimelow, director of international research at Keane Securities and a bull on gold: ''What happens if the public wakes up and sees gold funds outperforming general mutual funds?'' Brimelow predicts that the price of gold could rise above $500 just to reflect the depreciation of the dollar as of early October. ''If the dollar goes down further, gold could go higher, even without inflation,'' he says. The flare-up in South Africa's problems has depressed the value of typical South African mining shares from around five times earnings to three times earnings. Over the same time span the value of typical Australian and North + American mining stocks jumped from around 25 times earnings to as much as 40 times earnings. Brimelow says this change in trading ratios creates additional opportunities -- and risks. If an investor makes his gold play entirely in non-South African mines, he is betting on rising gold prices, but he is also in effect shorting South African mines. The trick, Brimelow says, is to balance investments between the two. Among gold funds that specialize in South African mines, Brimelow recommends Strategic Investments Fund (load) and United Services Gold Shares Fund (no load). Non-South African gold funds he likes are United Services New Prospector Fund (no load) and Van Eck Gold Resources Fund (load). He also recommends three gold funds that do the balancing themselves: International Investors (load), Golconda Investors (no load), and Franklin Gold Fund (load). North American companies he recommends are Battle Mountain Gold and Newmont Gold, both of which own mines in Nevada and Australia. Brimelow's picks among South African mines, where he says the biggest gains are to be made, are Vaal Reefs and Kloof Gold Mining, two large producers. For the more aggressive investor, he recommends Deelkraal Gold Mining and Consolidated Modderfontein Mines. Andre Sharon of Simms Capital Management, which moved 4.5% of its portfolio into gold this summer, likes four North American companies: American Barrick Resources, Agnico Eagle Mines, Echo Bay Mines, and Placer Development, a Canadian company that is the principal shareholder in Kidston, the biggest mine in Australia. He also recommends BGR-Precious Metals, a closed-end gold mutual fund. EUROPEAN RETAILERS. Consumer spending in Europe has lagged behind the boom in the U.S., but it's finally taking off this year. Overall domestic demand in EEC countries will be up about 4.5% in real terms, the largest yearly rise in the past decade. The biggest Continental retailers are well positioned to take advantage of the new growth, according to Rein van der Does, director of international research for Drexel Burnham Lambert. He discounts the British market because of the weakening pound. Faced with competition from specialty stores and discounters, several of the leading old-time European department store chains are restructuring their organizations, modernizing their stores, cutting costs, and selling off valuable but non-productive downtown real estate. A good example of reinvigoration is Karstadt, the biggest department store chain in West Germany (estimated 1986 sales: $5.4 billion). According to van der Does and his associate Rosemary Sagar, the company began a major restructuring in 1984 on the advice of McKinsey & Co., the U.S. consulting firm. Karstadt, which had suffered a long slide in earnings, brought in new management. It divided its 162 stores into five categories, from self-service discount to full-service high-price. It abandoned many low margin lines such as furniture, shrank floor space to improve productivity and free up real estate, and launched new specialty stores such as sportswear and children's clothing. So far it has refurbished a quarter of its stores. The stock is currently trading at 27 times earnings but only six times cash flow, which makes it a good buy, says Sagar. She figures it is also a good asset play because much of its downtown real estate, bought as long as a century ago, is being carried on the books at next to nothing. Van der Does also recommends Delhize, Belgium's second-largest department store chain (estimated 1986 sales: $4.5 billion), and Ahold, the largest food and consumer goods chain in the Netherlands (estimated 1986 sales: $5 billion). In France, Sagar singles out Darty (sales: $830 million), a fast- growing appliance chain that made its name on low prices and quick, dependable service. In Italy, she likes La Rinascente (sales: $1.6 billion), a department store chain that is aptly undergoing a renaissance. The stock prices of these companies ran up in 1985 and then fell as European markets staged their own rallies and corrections. Van der Does and Sagar predict that the stocks will get additional lift as international capital, hurt by the declining dollar, shifts out of U.S. equities. Moreover, European pension plans, which typically invest only 4% of their money in equities (vs. over 50% for U.S. pension plans), have been embarrassed as they watched local stock market indexes double and triple. Says van der Does: ''The potential buying power of European pension funds is enormous, and they have finally started to put their money into equities.'' CHEMICALS. An ailing giant for most of the early 1980s, the chemical industry has recovered dramatically and may well become a new market leader should the economy turn up. Chemical companies benefited handsomely from lower prices for oil, their main raw material. As big exporters they are getting an extra kick from the decline in the dollar. In the past few years they have eliminated a lot of underperforming assets, including a surplus of ethylene plants, which carry out the first steps in the refining process. They have raised utilization rates an average of ten percentage points and lowered breakeven levels. Cash flow has improved, allowing the companies to reduce debt and strengthen balance sheets. Says Charles Rose, chemicals analyst at Oppenheimer: ''If there's some real demand, you'll see earnings like never before.'' Leonard Bogner of Prudential-Bache sees a ''six-to-12-month window of opportunity'' for investors. Rose likes three specialty chemical companies in particular: Ausimont Compo (N.V.), Safety-Kleen, and Chemed Corp. He also likes Goodrich, which sells more chemicals than tires these days. Ausimont Compo is a Dutch company that makes specialty plastics, such as wire coatings, for the construction industry. Safety-Kleen produces cleaning solvents for factories, fast-food restaurants, and garages. Chemed, a conglomerate that recently spun off Roto- Rooter, makes most of its money from industrial chemical products. Leslie Ravitz, chemicals analyst at Salomon Brothers, is also high on the industry. His picks: Monsanto, Du Pont, and Rohm & Haas. Monsanto will do particularly well as its NutraSweet business grows an estimated 15% this year to $820 million. Du Pont, the industry leader, has shown increased profits at its Conoco subsidiary. Rohm & Haas's overseas profits nearly tripled in the first half of this year as the dollar declined. HOME IMPROVEMENT. Early Saturday morning visitors to hardware and building supply stores are finding them crowded with a motley mob of Reebok-shod yuppies and small-time contractors wearing construction boots. The great American renovation urge has been spreading for the past decade. The baby- boomers bought their first homes later in life than their parents, and inflated prices make it more difficult to trade up. Instead, many are fixing up. ''The do-it-yourself element has been one of the true growth sectors over the past 15 to 18 years,'' says Jonathan Goldfarb, a building and housing analyst at Merrill Lynch. In 1986 lower interest rates led to a record number of refinancings, often for more than the amount of the original mortgage. Many homeowners have invested their appreciated equity in improving their homes, adding new rooms and redoing kitchens and bathrooms. An estimated 10% acceleration in housing turnover this year should also raise spending on repair and improvement, Goldfarb notes. < Most big building-materials companies are tied to the housing construction cycle. Housing starts are expected to show a decline, from an estimated 1.85 million this year to 1.65 million in 1987. But some firms benefit significantly from home improvement. Goldfarb recommends Stanley Works, Masco, and Armstrong World Industries. Stanley (estimated 1986 sales: $1.5 billion) is the largest manufacturer of hand tools. Masco makes upscale kitchen and bathroom fixtures. The company has been a Wall Street favorite, all the more so since it announced a few months ago that it would acquire Henredon, a quality furniture maker. Armstrong (estimated 1986 sales: $1.9 billion) is the leading producer of floor coverings and ceiling materials. Barbara Alexander, building-materials analyst at Salomon Brothers, likes Masco and Armstrong but is also bullish on Lowe's Cos. and Morgan Products. Lowe's, a chain of building-materials stores in the Southeast (estimated 1986 sales: $2.4 billion), will profit from an economic turnaround in the region. Morgan Products, a small company (1985 sales: $265 million), is the leading manufacturer of high-quality millwork products such as staircases and bannisters and a major distributor of Anderson windows. Stanley Lanzet, Drexel Burnham's ''emerging growth'' analyst, likes Ply-Gem, a well-run maker of specialty wood products such as decorative wood paneling. AUTO PARTS. While the original equipment side of the auto parts business continues to suffer increasing price pressure from foreign competition, the after-market side (estimated 1985 revenues: $68 billion) could be poised for substantial improvement in sales and earnings. Owners typically invest the most money for replacement parts in cars that are three to seven years old -- a cohort of the auto population that will swell next year. New-car sales in 1983 jumped to 9.2 million from eight million the year before, according to the Motor Vehicle Manufacturers Association. Like the pig in the python, that bulge is just beginning to reach the after-market. Motorists, faced with escalating new-car prices, are also holding on to their old bombs longer. Jim Alexandre, auto parts analyst at Donaldson Lufkin Jenrette, estimates that the after-market will expand 5% in 1987, vs. an average annual contraction of over 3% during the past three years. Other positive factors are at work. Lower gasoline prices have led people to drive more, wearing out car parts sooner. Stepped-up emissions, safety, and inspection standards require better maintenance. Alexandre points to three companies that stand to gain the most from the bigger after-market. Echlin (estimated 1986 sales: $900 million) should lead the rebound because it sells the kinds of parts, like brakes, that get the greatest wear. His other favorites are Genuine Parts (estimated 1986 sales: $2.4 billion), an industry giant, and Standard Motor Products (estimated 1986 sales: $300 million), whose biggest business is ignition parts. DATA STORAGE. Among the survivors of the computer industry shakeout, the dominant disk and disk-drive manufacturers look like good bets, analysts say. The winners developed the best products and learned to generate sufficient cash to survive downturns. As capital equipment cyclicals, they should jump at the first signs of a speedup in economic growth. Even during the slump of the past two years, expanding output in units has more than made up for the decline in prices. James Porter, author of the Disk Trend Report, an annual market study, estimates that the disk and disk-drive sales will expand 24.3% next year to $18.7 billion. Seagate Technology, which makes nearly 50% of the small 20- to 30-megabyte drives today, is a Wall Street favorite. The company managed to shrink itself in half without going in the red when IBM cut back its orders sharply. Now Seagate does very well selling hard disk drives both to original equipment manufacturers and directly through computer dealers, often as accessories for IBM clones. Jean Orr, Drexel Burnham's computer peripheral analyst, recommended Seagate 18 months ago when it was trading just below $5 a share. Recently it sold around $16, and she still likes it. Orr is also pushing Cypher Data Products, a manufacturer of magnetic tape drives that are increasingly used as cheap backup systems for hard disks. Mark Obenzinger of Laidlaw Adams & Peck recommends Seagate, Micropolis Corp., and Xidex Corp. Micropolis is the market leader in 85-megabyte drives; Xidex is the biggest manufacturer of both floppy and hard disks and duplicate microfilm. Mark Boyer, the manager of Fidelity's Select Technology Fund, would add Maxtor, a leader in big 160- to 300-megabyte drives; Western Digital, a power in disk-drive controllers; and Quantum, a cash-rich company whose 20- megabyte ''hard card'' -- a memory add-on -- looks like a winner. BUSINESS SERVICES. As big corporations try to cut back overhead, many are contracting for services formerly handled in-house. This has been a boon to numerous business service companies, most of them small, that specialize in everything from security guards to data processing. ''The need may be year round, such as payroll processing, or temporary, such as fill-in receptionists,'' ob- serves Wayne J. Howe, an economist with the Bureau of Labor Statistics. Howe recently completed a study that found business services to be the fastest-growing industry in the economy. Business service employment doubled in the past decade, more than four times the overall rate of increase for the private nonagricultural economy. Among beneficiaries of the trend are temporary employment services. The two leaders, Manpower Inc. and Kelly Services, have been thriving. According to Jerry Levine, a security analyst at Merrill Lynch who recommends these two stocks, temp agencies as a group should keep expanding at a 15% annual rate; only a major recession would hurt them. Manpower, half of whose business is overseas, should get an additional boost from the dollar's fall. Other promising business service companies are more obscure and often highly specialized. Andrew Lanyi, managing director of Ladenburg Thalmann & Co., recommends two young companies. MPSI Systems Inc. (the MP stands for Management Planning) is a database company that uses its information on consumer income, traffic patterns, and demographics to help clients choose the best retail sites. Its customers include gas stations, banks, supermarkets, and fast-food restaurants. Sales should rise 20% this year to $25 million and keep rising to $33 million next year. Another computer data service company Lanyi likes is Total Assets Protection, the largest computer security consultant. The firm advises companies about everything from training personnel to protecting mainframes from natural disasters. The market for disaster recovery and security services is estimated to reach $23 billion by 1990. Six-year-old Total Assets Protection is only breaking even but expects to become profitable in 1987. It recently signed up Pillsbury, Paine Webber, Citibank, and IBM as clients. Robin Manners, an analyst with Value Line's OTC Special Situation Service, recommends Paychex Inc. as another promising business service. Paychex is the only nationwide firm that handles payroll and payroll tax preparation for businesses with fewer than 100 employees. Currently it serves 57,000 clients through 54 processing centers around the country. It has an estimated potential market of 2.7 million small businesses in areas where it already has branches.