(MONEY Magazine) – Last year's heartless stock market did not spare the most prestigious U.S. corporations. Though the Dow Jones industrial average managed to squeeze out a 2% gain overall, 13 of the 30 blue-chip companies that make up the average lost money, led by $9 billion Woolworth, which plunged 41%. The result: Some of America's premier companies are selling at prices that drastically understate their prospects.

There are two ways to take advantage of this rare opportunity. If you like the convenience of a basic but reliable investing system, you can simply buy the 10 highest-yielding stocks in the Dow, hold them until next year and then replace them with the 10 top yielders at that time (see the box below). Since high yields often mean a depressed price, this technique assures that on the whole, you're getting stocks that figure to be on the verge of a recovery.

On the other hand, if you'd like to concentrate on the Dow stocks that analysts see holding the most promise, consider the five stocks that follow, presented in order of projected return. Analysts foresee returns ranging from 14% to 38% over the next 12 to 18 months.

ALLIED SIGNAL (ald; NYSE, $34; 2% yield). Shares of Allied Signal (estimated 1995 revenues: $13.4 billion) fell 14% last year, in concert with those of its customers in the economically sensitive aerospace, automotive and chemical industries. But Allied Signal is no longer the creaky cyclical conglomerate that chairman Larry Bossidy took over in mid-1991. Under his leadership, profit margins have doubled, underperforming divisions have been sold, and product quality has improved. "This company is not being given credit yet for being a better business than it was four years ago," says money manager Stephan Weinberger of Pine Tree Capital in New York City.

Analysts believe several of Allied's businesses could excel in the coming years. The aerospace division, reeling from a 14% drop in U.S. Government contracts, should at last see its aircraft maintenance and components businesses rebound as commercial airlines upgrade aging fleets. And since 37% of sales come from overseas, the emerging European economic recovery figures to boost sales there. Weinberger sees earnings climbing 17% in 1995 and 15% thereafter. He believes the stock could reach $46 in 18 months for a 38% total return.

CATERPILLAR (cat; NYSE, $55; 1.8% yield). The world's leading maker of heavy earth-moving equipment, $14.5 billion Caterpillar is well positioned to profit from worldwide economic growth and major capital building projects in emerging countries. The stock is off almost 10% from an early 1994 high of $61; many analysts think the price drop has created a great buying opportunity.

"The industry was hurt by a perception that the recovery was over once the Federal Reserve raised rates," says money manager James Melcher of Balestra Capital Management in New York City. "But this cycle is lasting longer than people realize. Plus the worldwide need for new infrastructure has never been greater." Almost 50% of Caterpillar's sales are from overseas, with 23% coming from developing countries. Lehman Brothers analyst Karen Ubelhart expects earnings to rise 25% this year. She thinks the stock could reach $72 in the next 12 to 18 months, for a 34% total return.

PHILIP MORRIS (mo; NYSE, $57.50; 5.7%). This year's highest-yielding Dow stock, $68 billion Philip Morris began to recover last year from a devastating 1993. Dividends were boosted 20%, the company continued its $2 billion, three-year share repurchase program, and a new chairman, Geoffrey Bible, was appointed in December.

While cigarette consumption continues to decline in the U.S., tobacco profit margins are on the rise again for the first time since Philip Morris slashed the price of its flagship Marlboro brand two years ago. Marlboro's market share has jumped from 22% to 29% since the price cut, and the company has quietly begun raising prices.

Perhaps most important, though, Philip Morris is not exclusively a cigarette maker. Since 1992, profits from its domestic food business, led by brands such as Maxwell House coffee and Post cereals, have risen from 22% to 29% of corporate earnings. Underscoring the importance of the food operations, the new management team has acted quickly to shore up profits there, shedding a less profitable institutional food service company and merging its two consumer divisions, Kraft and General Foods, to streamline operations.

But uncertainties created largely by smoking liability lawsuits continue to keep a lid on the stock. However, A.G. Edwards analyst Barry Ziegler points out that cigarette makers have never had a judgment go against them. That suggests, he says, that Philip Morris is unlikely to be hit with major monetary damages. Ziegler thinks overall profits could rise 15% this year and the stock could hit $70 a share in the next 12 to 18 months for a 30% total return.

J.P. MORGAN (jpm; NYSE, $56; 5.3% yield). Last year's stock market was tough on investors, but it was far worse on investment banks, including J.P. Morgan (assets of $138 billion). As rising interest rates kept corporations from issuing new bonds, J.P. Morgan's 1994 profits fell an estimated 20%, and the stock took a 25% header. Now J.P. Morgan yields more than 5% and is trading just above its book value, making it an extraordinary buy, according to Personal Finance editor Stephen Leeb ($99; 800-832-2330). "There hasn't been a time since the months following the 1987 crash that you could buy J.P. Morgan at book value," Leeb says.

Leeb says that J.P. Morgan enjoys stellar management, rock-solid financial standing (it is one of the few AAA-rated financial companies) and global reach. He points out that with 65% of its loan portfolio overseas, the company should profit from an economic pickup in Japan and Europe. Leeb figures earnings will grow 10% to 15% a year and that the stock could reach $65 in the next 12 to 18 months for a 24% total return.

AT&T (t; NYSE, $50.25; 2.6% yield). Shares of $76.5 billion AT&T, the nation's most widely held stock, fell 13% from a June high of $57 last year. At its current price, analysts think it could be one of the best buys on the Dow for conservative investors. They argue that the second-half sell-off was an overreaction to two developments:

The most important was the Republicans' congressional victory in November. The new Congress, it was feared, is likely to lower the regulatory barriers that keep local phone companies out of AT&T's long-distance business. Yet AT&T's believers point out that deregulation could actually help the company by forcing the Baby Bells to reduce access charges to local phone markets.

The second main worry was that AT&T overpaid in its $11.5 billion purchase of McCaw Cellular in September. But Charles Carlson, editor of Dow Theory Forecasts ($233; 219-931-6480), approves the acquisition as part of AT&T's long-term strategy to be the world's leading telecommunications company. "AT&T is aggressively repositioning itself to reap the benefits of changing global markets," he says.

Besides, the firm's core domestic long-distance business seems to still have plenty of life. AT&T added more than 1 million long-distance customers last year, the first net gain since the 1984 breakup. Prudential analyst Michael Elling believes earnings will rise 14% to $3.60 a share in 1995, powering the stock to $56 within 12 months for a 14% total return.