(FORTUNE Magazine) – Many stock pickers are warning that the dizzying climb of drug stocks cannot go on, but William Hayes, 52-year-old manager of Fidelity's $270-million Select Health Care Portfolio, is not listening. As Hayes fondly notes, doomsayers prophesied a setback for drug stocks for the past three years, while his drug-heavy portfolio bounded ahead as if it were on steroids. Select Health Care beat Standard & Poor's 500-stock index by 72 percentage points over the past five years, according to CDA Investment Technologies of Silver Spring, Maryland. Even better, it outstripped the S&P drug-stock index by 57 points, with a total return of 219%. To beat the market in 1987, Hayes recommends more of the same. In a recent interview with FORTUNE's Andrew Serwer, he tells what belongs in the medicine chest now:

It seems strange that your fund holds almost no stocks of hospital management companies and health maintenance organizations. Ever since the government changed the reimbursement system three years ago, hospitals have been forced to cut the average stay for Medicare patients. But there are still too many beds out there, and we will continue to see more consolidation and cutbacks over the near term. So I'm avoiding that group. HMOs sprang up all over the place in the past several years and their stocks had a good run. Now HMOs face a tougher time as the business becomes more and more competitive. Right now I think the big drug companies are the place to be.

Why? The companies I like all have exciting new drugs, which I think are going to be big sellers. Although it's hard to predict when the Food and Drug Administration will act, approval for some of these seems right around the corner. Many of the big companies are multinationals, and I expect the dollar will continue to weaken, which helps earnings.

Isn't the action over in so-called defensive stocks, like food and drugs? I've been hearing economists forecasting for the past three years that the economy is going to pick up. Though many economists expect a slight speedup, I don't see any red-hot signs that 1987 will be a robust year. If so, drug stocks will show positive earnings growth relative to the overall economy.

What's one of your favorites? One company with a very exciting outlook is Merck. Its new drug, Lovastatin, which reduces the cholesterol level in the blood, could be worth a billion dollars a year in sales. As baby-boomers hit 40, they'll start to realize they aren't immortal and demand for Lovastatin will really pick up. I also think Lovastatin, which the FDA will probably approve this year, will be readily accepted by the medical community. Merck's new hypertension drug, Vasotec, is already on the market and doing very, very well. The company has superior management and puts tremendous emphasis on research.

The stock has doubled since January 1986. Isn't it too pricey? Recently Merck was selling at $135 a share. I see the company earning at least $6 a share this year, up from an estimated $4.75 for 1986. I don't think the stock price is too high for those kinds of numbers. It could be selling for $150 by midyear.

What other companies have promising drugs? Squibb has a very successful hypertension drug called Capoten. Sales topped $500 million last year, a tremendous leap over 1985, and it looks as if they will reach $650 million this year. Squibb could earn more than $6.50 a share this year, which would be a 28% gain over my 1986 estimate. Eli Lilly has an antidepressant called Prozac. This drug could be a big winner because it not only alleviates depression but appears to help people % lose weight, quit smoking, and stop drinking. Obviously these are three huge markets if the drug works out. I estimate that Lilly earned $4.05 a share in 1986 and will earn $4.50 this year. Upjohn's Rogaine, a hair-stimulating drug, also comes to mind. Originally its active ingredient, minoxidil, was taken orally for hypertension, but as a side effect it often promoted hair growth to an unacceptable degree. Doctors discovered, however, that minoxidil applied to the skin caused hair growth without affecting blood pressure. Rogaine is already being used abroad, and FDA approval should come soon. Upjohn probably earned $4 a share in 1986, up 22% from 1985, and I look for at least $5 in 1987.

Many are saying that 1987 will be the year of small stocks. Do you agree? I have some exposure to smaller stocks, but right now I still favor the bigger ones. One company I like very much, which has really become a first- tier stock, is Marion Laboratories. The drug Cardizem, which accounts for more than half of sales, combats angina, a narrowing of the arteries that causes a very debilitating heart pain. The FDA may soon approve its use for treating hypertension and preventing heart attacks.

Investing in biotechnology still requires faith. Are you a believer? Biotechnology is really the shape of the future. Already some drugs out there are working, such as Genentech's human growth hormone. Genentech will also receive FDA approval very shortly for TPA, a drug that dissolves blood clots. This could be a billion-dollar-a-ye ar drug. I think everyone who has a heart attack will be given TPA. Another stock that should benefit from the use of TPA is C.R. Bard, the hospital supply company. One week after a heart attack occurs, doctors go in with a catheter and take a look to see if the TPA worked. Bard makes these catheters, and I expect its business to double or triple because of TPA.