(FORTUNE Magazine) – It's no secret: The party in junk bonds is over. Whacked by widespread selling, the return from junk fell to 4% last year. The new year has been no kinder. Rocked by the $3.8 billion default of Campeau's retail units and most recently by the downgrading of RJR Nabisco's $19.5 billion of bonds, the sell- off continues. Indeed, given all the bad news, how many people in their right mind would want to own junk? Very few, and that's precisely why now may be the best time to consider the idea. As investor worries have grown, junk bonds have fallen to temptingly low prices. The average price for all junk is down 10% since June, pushing the average yield up to 16.3%, a near-record spread over Treasury bonds (see chart). Some of the sell-off is warranted. But as in most market panics, even the good stuff is getting pounded, and that creates value. Says Gary Brinson of Brinson Partners, a Chicago investment firm: ''For the first time in quite a while, we see some excellent opportunities.'' Even so, junk bonds will continue to offer investors a wild ride. Moody's Investors Service expects 10% of outstanding junk issues to default in 1990, up from last year's record 6% default rate. Given investors' skittishness, anything close to that rate could knock the market for a loop. But for investors who can withstand the rising volatility and hold on for the long term, the enriched yields make the ride worth taking. The simplest approach for individuals, of course, has been through mutual funds, which offer professional management and broad diversification. But lately junk bond funds have been hit by tumultuous redemptions -- more than $450 million in December alone -- forcing the managers to raise cash by selling bonds at sharply reduced prices. An unusual but wiser bet for now may be to buy individual junk issues. Though the junk market is dominated by institutions, individual investors can usually buy small lots of as little as $1,000. To be safe, the investment should represent only a tiny part of your portfolio -- say, no more than 5%. What's more, the investment should be diversified among several issuers of relatively high credit quality. In the world of junk, that means issues that are rated at least single B. Such a rating suggests that the issuers have reasonably fair prospects for meeting interest and principal payments, even in a recession. Many of these sturdier junk bonds have recently been yielding as much as 13%. Among the most highly regarded by junk bond experts are the issues of supermarket chains, which have very stable cash flow. Among the current favorites of junk buyers are bonds of Kroger, which incurred large debt to fend off a takeover attempt by the Haft family in 1988, and Safeway Stores, a chain that was taken private in 1986. Says Martin Wiskemann of the Franklin AGE High Income Fund, which owns both bonds: ''These companies have strong managements that are determined to pay down the debt as quickly as possible.'' Also highly ranked by bond market pros are cable television companies, for both their stable cash flow and their strong growth prospects. Because of that, money managers are comfortable with these bonds even though the issuers work with frighteningly low interest coverage -- a simple ratio of cash flow to interest expense. The optimism may be justified: At present an estimated 40% of cable-ready American households have yet to subscribe. William Veronda, who runs the Financial Bond Shares-High Yield Portfolio in Denver, is loading up on Turner Broadcasting System bonds, which recently yielded 12%. Turner reaches virtually all cable subscribers with its CNN news channel and is rapidly developing viewership for its new and already profitable TNT entertainment channel. Another of Veronda's cable industry buys are the Viacom International 11 4/5% bonds due in 1998. Viacom is a major cable system operator that also owns the Showtime movie channel. Several respected value investors, including Peter Lynch of Fidelity Magellan Fund, have bought the bonds of Fort Howard, which is insulated from the vagaries of the economy through its heavy sales of such household staples as paper towels and toilet paper. The company is also well protected from competition because of the high cost of machinery in its business. Although the health care industry has been troubled by rising costs, Mark Arnold of BEA Associates in New York says the vital signs on Hospital Corp. of America, the hospital operator that was taken private in a management buyout, are all good. ''Its business is strong, and the management is way ahead on its asset sales schedule,'' he says. The bond yields only 9.1%, but since it sells at a discount, there's an extra payoff when it is redeemed at par in 1993. Arnold also recommends the bonds of HealthTrust, an operator of rural hospitals that HCA spun off in 1987. Its cash flow exceeds interest on its debt by 40%. < Eric Ryback of the Lindner Dividend Fund has turned up an issue that is unlikely ever to give investors a sleepless night: Twentieth Century Fox Film, now owned by Rupert Murdoch's News Corp. The bonds are backed by the studio's assets as well as those of News Corp. However, the clincher is the company's interest coverage, nearly 9 to 1. ''We buy junk bonds as if we're marrying them,'' says Ryback, ''so we like to know everything is going to work out.'' The bonds yield 13.5%.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: A GAP THAT BECKONS PROMISING JUNK BONDS The best bets: bonds backed by recession-resistant businesses, like Fort Howard's bustling toilet paper operations