(MONEY Magazine) – As the Dow Jones industrial average roared to one overvalued record after another in January, investors had much to celebrate. But the Dow's sharp drop in early February reminded them that they had reason to worry too. Your smartest stock strategy therefore is to concentrate on only the safest issues right now. You could go shopping for stocks that are extremely cheap -- by measures such as price/earnings or price/book-value ratios. But we think there's a smarter strategy: Bet on the thoroughbred stocks. By that we mean the shares of companies with debt equal to less than 15% of capital, excellent earnings histories and superb prospects for future profit growth. "The only thing that drives stock prices over the long haul is earnings growth," says analyst Robert Goldman at Smith Barney Shearson in New York City. "If stocks have that, they'll do fine." To find the thoroughbreds, we screened Value Line's almost 1,700-stock universe for low-debt stocks with reasonable P/Es and terrific earnings records. Five issues were standouts and also got strong recommendations from analysts. Here's a look at them, in order of potential price gains over the next 18 months: The Gap (ticker symbol: GPS; recently traded on the New York Stock Exchange at $42.25 a share; 1% yield). This retailer (estimated 1994 sales: $3.8 billion) stumbled in '92 when its basic line of jeans and T-shirts slipped out of fashion. Earnings fell to $1.47 a share, down from $1.62 the previous year. But like a true champion, the company quickly recovered its stride. Currently, both Gap stores and the firm's Banana Republic chain are showing strong 4% to 5% year-over-year sales growth at existing outlets. Moreover, The Gap plans to boost total square footage nearly 20% this year. The company has revamped its product line as well. "The stores still carry basics," says analyst Janet J. Kloppenburg at the New York City office of Robertson Stephens, "but they also have current fashions such as long skirts, wide-leg pants and leggings." Kloppenburg projects that the company's earnings can grow at nearly an 18% annual rate through 1998 and thinks the stock can rise more than 30% to $55 over the next 18 months. Great Lakes Chemical (GLK; NYSE, $78.75; 0.5% yield). "This company has had a fabulous growth record and can increase earnings at a 15%-plus annual rate over the next five years," says analyst Robert D. Hardiman at Merrill Lynch in New York City. Most of that growth will come from Great Lakes' highly profitable specialty chemical businesses -- such as the manufacture of flame retardant for plastics -- that account for more than half its sales. Much of the rest of the $2 billion company's revenues comes from tetraethyl lead (for old-fashioned leaded gasoline). Though the product is no longer used in the U.S. or Japan and is on the way out in Europe, consumption is growing in developing countries. In addition, the company can increase profits from tetraethyl lead by raising prices, especially since its chief competitor, Ethyl Corp., will stop making the additive this month. "Great Lakes is now using cash thrown off by the lead business to make specialty chemical acquisitions," says analyst Kim Ritrievi at Lehman Bros. in New York City. She thinks Great Lakes stock will advance in line with earnings and reach $100, a 27% gain from here, over the next 18 months. Intel (INTC; traded over the counter, $65.25; 0.3% yield). Trading at less than 12 times estimated 1994 earnings of $5.75, $10.3 billion Intel looks like a bargain to analysts. The stock is so cheap for an understandable reason: The giant computer-chip maker, which supplies the silicon brains for PCs, is - facing serious competition. Advanced Micro Devices' chips are gaining ground against Intel's older generation of 486 chips, while IBM, Motorola and Apple are jointly producing their PowerPC chip to compete with Intel's new Pentium. Analysts say, however, that Intel will remain dominant in PC chips. "The whole PC business has been built around Intel chips," says analyst Martin Ressinger at Duff & Phelps in Chicago. "Now that PCs are all being interconnected, no one will want to introduce a black swan into a network." As for the future, analyst Jonathan J. Joseph at Kidder Peabody in New York City says: "Other companies will provide little direct competition with Intel's Pentium over the next two years." And Intel impressed analysts in late January by announcing that it would start shipping its next-generation chip, the P6, in 1995. Ressinger figures that Intel stock could move up 23% to $80 a share within 18 months. Abbott Laboratories (ABT; NYSE, $29.50; 2.3%). "Abbott's earnings track record is just unbelievably consistent," says analyst Lorraine Schwarz at Wertheim Schroder in New York City. "It's a good way to put a toe back in health care without much risk." The $9.3 billion company's steady profit growth (up 12% in 1993's fourth quarter) is caused largely by its diversification in four health-care businesses -- pharmaceuticals, laboratory and hospital instruments, infant formula and nutritional products, and diagnostic tests -- explains analyst Louis C. Webb at Robert W. Baird in Milwaukee. He expects Abbott's promising new drugs to help keep earnings climbing 12% to 14% a year. Among them are Biaxin, an antibiotic especially useful for treating upper-respiratory infections, and Hytrin, an antihypertensive that received FDA approval in September for treating enlarged prostates. The analysts think Abbott Laboratories stock could rise 22% to $36 a share in the next 18 months. Stryker (STRY; OTC, $35; 0.2%). This small health-care company's earnings have just about doubled in the past three years and could grow at least 20% annually over the next three, says Robert Goldman at Smith Barney. The $675 million Kalamazoo firm gets half its profits from orthopedic implants -- used to repair damaged spines, for instance -- and most of the rest from surgical equipment and specialized hospital beds. Though the stock has suffered along with the rest of the health-care group, dropping more than 35% since early '92, "the company's earnings have never missed a beat," says analyst Jonathan Osgood at Alex. Brown & Sons in Boston. He expects the stock to rise along with profits and sees it reaching $40, a 14% gain from here, within 18 months. Moreover, with the fastest earnings growth of the five stocks, Stryker could offer the biggest boost to your portfolio's long-term returns.

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