(MONEY Magazine) – FUND COMPANY PRESIDENT DAVID ALGER is relentlessly optimistic about 1996--and not just because he expects his firm's softball team, the Alger Bulls, to win its fourth straight Staten Island Industrial Softball League championship. More important, Alger thinks that the stock market is still undervalued, in spite of the 39.7% rise in the Dow Jones industrial average to 5160 last year. And that gives $42.5 million Alger Capital Appreciation, one of 1995's two top-performing diversified equity funds, another chance to win big.

In the year to Dec. 1, Alger Capital (5% deferred sales charge declining to zero in six years; 800-992-3863) returned a stunning 86%, vs. 30% for the average equity fund and 34.9% for the benchmark S&P 500 index. That meant a 38% average annual return for the fund since its founding in November 1993. Gushes Alger, 52, president of Fred Alger Management in New York City, the 18-fund firm established in 1963 by his older brother: "We've been on a roll, and I can't see why we shouldn't keep rolling."

His case that stocks are undervalued rests on several key market measures. For example, the 30 Dow Jones industrials are trading at 16 times their earnings per share, vs. their 10-year average of 22. Alger is also encouraged by the relationship between the long-term Treasury bond yield, lately 6.1%, and the earnings yield of Standard & Poor's industrial index, recently around 5.9%. (The earnings yield is calculated by dividing the S&P's price-to-earnings ratio into 100.) He explains: "Every time the earnings yield has fallen to around 50% of the long-bond yield in the past 15 years, the market has proved to be overpriced. And when the earnings yield has approached 90%, it has proved to be cheap. Today, it's above 90%."

Thus Alger and portfolio manager Seilai Khoo, 32, disagree with the many investment forecasters, including MONEY's Michael Sivy, who think the stock market will stall this year. To the contrary, say Alger and Khoo, the Dow will top 6000 by year-end. And they believe there are fast-growing companies in several industries, including health care and technology, that could rack up even bigger gains in 1996. Below are four favorites--all in Capital Appreciation's 82-stock portfolio--ranked by their projected 12-month returns:

Lone Star Steakhouse & Saloon (ticker symbol: STAR; recently traded on NASDAQ at $37; no yield). Lone Star, a $319 million chain based in Wichita, has thrived on a menu of high-quality steaks at bottom-round prices--the average check per customer is a lean $18. Profits have more than doubled in the past three years, as Lone Star has increased its outlets nationwide from 59 to 173.

This year the company expects to open 56 more Lone Star restaurants and expand two new chains to round out its product line. The first, Sullivan's, a mid-priced steakhouse in Austin with an average ticket of $35 a customer, will have 100 or so outlets nationwide by the year 2000. The second, Del Frisco's, a premium-priced eatery in Dallas, charges roughly $60 for prime rib or sirloin dinners. The restaurant, says Alger, averages $10 million in annual sales, and Lone Star plans to open 30 new Del Frisco's across the country by the turn of the century.

Although these new outlets won't turn a profit until 1997, Alger expects last year's start-ups to help boost Lone Star's 1996 earnings 47%, lifting the stock 34% to $50.

Oakley (OO; New York Stock Exchange, $33; no yield). This $169 million company's funky sunglasses and goggles are de rigueur for any self-respecting beach volleyball player or downhill skier, despite prices of $89 to $129 a pair. To pump up sales, Oakley, of Irvine, Calif., enlists product endorsements from celebrity athletes, including baseball star Rickey Henderson, tennis bad boy Andre Agassi and basketball legend Michael Jordan, a member of Oakley's board.

That marketing strategy, and Americans' growing concerns about ultraviolet rays' harmful effects, have fueled Oakley's 82% growth in revenues since 1993. Khoo expects the company to maintain that pace this year as it expands into the $2 billion nonsports sunglass market. She estimates that Oakley's profits will rise 30% and its stock by a similar percentage to $44.

Digital Equipment (DEC; NYSE, $63; no yield). One of the fastest-growing makers of computer systems in the 1980s, DEC turned bloated and inefficient early in this decade and suffered three years of staggering losses totaling $2.1 billion. Now, says Khoo, the $13.8 billion Maynard, Mass. company, which managed to earn 15¢ a share in 1995, has turned the corner.

Over the past five years, DEC has more than halved its work force to 62,000. At the same time, the company has developed an impressive array of leading-edge products, including the Alpha microprocessor, which the Guinness Book of World Records lists as the world's fastest computer chip. Used in DEC computer workstations and servers, the chip generated $1.7 billion sales in 1995, up 76% from a year before. Khoo also applauds DEC's decision to produce workstations that run Microsoft's Windows NT, which is becoming the operating system of choice among corporate customers because of its flexibility. She thinks DEC will earn a whopping $6.50 a share, fueling a 27% surge in its stock to $80.

Hologic (HOLX; NASDAQ, $42; no yield). Alger and Khoo are betting that a recent breakthrough in the treatment of osteoporosis, which afflicts roughly half of all U.S. women over 50, will be a booster shot for $43 million Hologic, of Waltham, Mass., a leading manufacturer of bone densitometers, used to diagnose the disease.

Here's their thinking: Last September, $16 billion pharmaceutical heavyweight Merck received Food and Drug Administration approval for Fosamax, a low-cost ($1.75 a day) osteoporosis drug that analysts expect to break the critical $1 billion sales mark within three years. Merck estimates that U.S. doctors will need 4,000 new densitometers (cost: $50,000 to $135,000 each) to meet demand for early diagnosis, on top of the 1,000 in use today. Says Khoo: "Hologic, which already has 50% of the market and makes the best machine, is in a perfect position to benefit from increased efforts to prevent and control osteoporosis." She expects Hologic's profits to shoot up 30% and its stock to climb 22% to $51.

ALL STOCK DATA AS OF DEC. 8