(MONEY Magazine) – If you agree with the widely followed investment theory of three steps and a stumble, you are on red alert. The theory is based on the fact that the stock market generally falls 20% to 30% whenever the Federal Reserve Board raises the discount rate -- which it charges on loans to member banks -- three times in a row. The first step occurred on Sept. 4, 1987, when the Fed raised the rate from 5.5% to 6%, and the second on Aug. 9, 1988, when amid concerns about rising inflation the Fed boosted the rate to 6.5%. ''The Fed won't tolerate inflation,'' says economist Steven Malin at the Conference Board, a New York City research group. ''If it looks like inflation is creeping up, the Fed will allow interest rates to rise.'' A summer-long rash of economic statistics showing mounting pressure on prices was broken by the weaker-than-expected employment figures announced in September. That respite may give the stock market a chance for a short rally (see the box below). But many economists warn that a third discount-rate increase may be necessary. ''Investors should be ultraconservative right now,'' says Donna Meidinger, an analyst with the A.G. Edwards brokerage in St. Louis. Analysts who share this view are recommending companies with strong balance sheets that make products consumers will continue to buy even in an economic downturn. Ten such stocks can be found in these industries: Food. ''There is truth in the old adage that 'people always have to eat,' '' says analyst Craig Carver of Dain Bosworth, a Minneapolis brokerage. He especially likes ConAgra, which makes food items ranging from flour to frozen entrees. In addition, Carver says, ConAgra's chemical and fertilizer sales are likely to improve as farmers plant more acreage. Other stock pickers like Hershey Foods, which recently won praise from analysts for its purchase of Cadbury's U.S. candy operations, including Peter Paul Mounds bars. Hershey has operating profit margins of 16% -- compared with only 2% margins for its acquisition. Raising Cadbury's anemic margins is ''an eminently doable task for Hershey,'' says analyst Harry Segalas of Shearson Lehman Hutton. Beverages. Because consumers are unlikely to cross inexpensive beverages off their shopping lists, analyst George Thompson of Prudential-Bache likes Anheuser-Busch and Coca-Cola. Both have tremendous clout with suppliers, enabling them to negotiate low prices. Utilities. Water companies are rated tops for safety by many stock pickers. ''Water use doesn't change much with economic conditions,'' says Rudolf Hokanson, who follows the industry for Blunt Ellis & Loewi in Milwaukee. He recommends American Water Works, the nation's largest private water utility, and United Water Resources, which serves parts of New Jersey and New York. Among other utilities, analysts like regional telephone companies. Meidinger at A.G. Edwards favors BellSouth, which recently announced plans to offer computer data services to consumers and businesses; and Ameritech, whose management has been using the company's high cash flow to buy back shares and raise dividends at an average annual rate of 7.8% since 1984. Natural gas. Demand for natural gas is up nearly 6% and prices have firmed 24% because gas-fired electric utilities worked overtime this summer to keep air conditioners humming. Longer term, the public's concern about air quality is likely to make relatively clean-burning natural gas used more widely. The premier choice among gas production companies is Anadarko Petroleum, says analyst Marshall Acuff of Smith Barney. Utilities that distribute gas to consumers are a more conservative way to play the industry, says Mary Clink, who follows the stocks for Prescott Ball & Turben in Cleveland. She recommends Consolidated Natural Gas, which boasts a strong balance sheet and an extensive pipeline network across the country.

CHART: NOT AVAILABLE CREDIT: MARK MATCHO CAPTION:Stocks for a defensive portfolio These companies, which provide staple goods and basic services, can hold up well even if the economy deteriorates next year. All 10 trade on the New York Stock Exchange. DESCRIPTION: Investment information on ten stocks.