(FORTUNE Magazine) – THE BULL MARKET in equities lives,'' says Robert Stovall, the fourth-place finisher in the 1987 Challenge. Stovall, 61, is president of Stovall/Twenty- First Advisers, a subsidiary of Twenty-First Securities. He expects the Dow Jones industrial average to climb to 2900 over the next 12 months as oil prices fall and corporate profits rise. The weak dollar and increased U.S. protectionism, which could become an issue in the 1988 elections, will induce more and more foreign manufacturers to produce goods for the U.S. market on U.S. soil, he believes. Restraining the bull, however, Stovall says, are creeping interest rates and the consumer credit load. Consumers, already near the end of their credit lines, will have to strain to make increased payments on their variable-rate mortgages. That will leave fewer dollars for consumer spending and smaller profits for retailers. Changes in the tax laws, the decline of the dollar, and corporate restructuring lead Stovall to believe that the big earnings gains in the year ahead will come in manufacturing. He leans to business-cycle-sensit ive industries such as paper and chemicals, but he envisions a general rise in profits for industrial companies. ''It's an earnings-driven stock market,'' he says. ''Stock markets usually maintain upward momentum during periods of good-quality earnings, even if interest rates inch up. The painful transition period following the Tax Reform Act of 1986 will largely be over as we move into 1988. The top corporate tax rate will have dropped from 46% in 1986 to 34% in 1988. After-tax corporate profits as a whole will rise.''

Brush Wellman seems at odds with your preference for stocks that are sensitive to the business cycle. I do think the market will pay more attention to business-cycle-sensitive stocks, but Brush Wellman is a special case. Unlike other companies in nonferrous metals, Brush Wellman really does not have much competition. The ! company used to be called Brush Beryllium, and it is the No. 1 company in that metal. Beryllium has unique properties. It is anticorrosive and antimagnetic. It is light and tough. It is used for electronic, space age, and computer and semiconductor applications. Brush Wellman's earnings were $1.20 a share last year and should rise about 30% a year over the next two years.

But Brush Wellman has never had much competition. Why is it attractive now? For one thing, beryllium is being used more and more. But more importantly, the company opened a plant in Japan recently. It has been losing money, but the earnings should start kicking in soon.

Why did you pick Ryland Group? A typical business-cycle-sensitive stock. Ryland Group builds tract houses up and down the East Coast and in California. They have had some of the shingles knocked off since April by the rise in interest rates and mortgage rates. But they sell at nine times earnings, less than half the multiple of the Dow Jones. The company has coped well in all interest rate environments for the last 15 years. It will do well in this one. It is down now, and now is the time to buy it.

Great Northern Nekoosa and Willamette Industries are business cycle sensitive too? That's right. Both companies make commodity paper, which goes principally into linerboard and boxboard, as opposed to coated paper or finished paper. I think the earnings of both Willamette and Great Northern Nekoosa are probably going to rise 40% next year. And this year earnings are already up strongly. The whole commodity paper industry looks good. Domestic producers are tough competitors in world paper markets, particularly against the Scandinavians, our main rivals along with Canada. The cost control programs of recent years have been very effective. U.S. paper companies have also benefited from the weak dollar, which makes their products cheaper abroad.

What do you see ahead for Olin? The weaker dollar has helped Olin too, because it produces commodity chemicals, which have to compete in price. I think companies in the commodity chemical business will help lead the way in the coming rise in corporate profits. I see an especially strong rise for Olin. Its earnings have lagged, hobbled by weak prices linked to old contracts. But we think we will see a 30% increase in earnings this year.

Won't the weak dollar hurt your British company, Glaxo? Competition from U.S. - drug companies will be tougher, and North America accounts for about a third of Glaxo's sales. A weak dollar does hurt, but the company has started manufacturing here in the U.S., and it will manufacture here more and more as time goes by. The stock is an institutional favorite that sells at a lower price-earnings multiple than some big U.S. drug houses. Glaxo has a good product line and more new products coming.

Are new products part of Chrysler's appeal, as you see it? Yes, but only part. The stock sells at around $40, with earnings last year of more than $6 a share, so the price-earnings multiple is low. They have finally completed retooling and relocating facilities, and so for the first time under this aggressive new management, the company will be operating all its plants in the U.S. and Canada at optimum rates. Although the purchase may not add to profits right away, buying American Motors fleshes out the product line and gives the company utility vehicles popular with the 20-to-40 age group.

Buying another company has hurt Ames Department Stores, hasn't it? Temporarily. Ames is a variety discount chain, based in Connecticut, that until recently had an outstanding record of growth. In 1985 they bought G.C. Murphy, another retail chain, which did not have the same inventory and management controls Ames has. Ames has been suffering inventory leakage problems at G.C. Murphy. As a result, the stock is near its low of the past several years. The chairman is aging. I think it is a candidate for an earnings recovery and possibly for restructuring.

Do you think of Corning Glass as a possible takeover target? It certainly could be. It has been mentioned frequently as an ideal combination company to fit into some giant like GE. Any number of other giants could use Corning's great cachet as a science-oriented research company and one of the world's premier manufacturers of glass and ceramics. It produces the Pyrex line, which is a steady moneymaker, and the money-losing but very prestigious Steuben crystal. The company spends a lot of money and effort on R&D in glass and ceramic products. And it has changed management within the family. The controlling family retains the chairmanship role, but the new management -- under Amory Houghton's younger brother James -- is more businesslike when it comes to profit and loss.

The battle at Salomon Brothers must irk you. It started just after you picked + the stock for your portfolio this year. I liked the company more before the start of this equity baton passing, from Sir Harry Oppenheimer of South Africa to John Gutfreund of Wall Street to Warren Buffett of Omaha, bypassing the acquisitive Ronald Perelman of Revlon, at least for now. But I think Salomon stock still has a few more points to go up. In fact, all this indicates that smart money thinks financial services stocks are underpriced. You'll probably see a lift in other brokerage stocks, like First Boston and Paine Webber.

You have two companies, Whitehall and Harris, that make military equipment. Yes. Both make military hardware. Whitehall is much smaller than Harris, but both are smallish military providers compared with, say, a Boeing. Either or both could be acquired during the year. Also, I think if we go to a partial demobilization of the nuclear strike forces, we'll be spending more money on conventional weapons. That would benefit these two, which manufacture equipment for airplanes, tanks, and submarines, among other things. One theme I think we will be pursuing this year is that the Japanese may have taken the watch business from the Swiss, and the binoculars business from the Germans, and the camera business from the Swedes, and the film business and the auto business from the Americans, but so far, no country has been able to take military technology, especially defense electronics, away from the U.S. We're still paramount in that.

CHART: TEXT NOT AVAILABLE CREDIT: CHARTS AND GRAPHICS BY RENEE KLEIN CAPTION: NO CAPTION DESCRIPTION: Twenty-First Securities portfolio, 1988 Investment Challenge.