(MONEY Magazine) – Renowned fund manager Ken Heebner is back where he likes to be-- at the top of the performance charts. Last year his flagship growth fund, $570 million CGM Capital Development, racked up a hefty 41% gain, compared with its peers' 31.6%. And since January, CGM Capital has zoomed 13%, double its fund sector's 5.3% average.

That sustained success amounts to a decisive comeback for Heebner, 55, who in 1994 steered CGM Capital to a painful 23% loss--his worst in his 20 years as manager. "My strategy of shooting for big gains means accepting greater volatility," he says. "But this year proves once again that the gains outweigh the losses over the long run." Indeed, for the 15 years that ended March 31, CGM Capital ranks No. 1 in its category, according to Chicago fund rater Morningstar.

CGM Capital is closed to new investors, but two of Heebner's other funds at $6 billion Capital Growth Management in Boston are open--and also whipping their category averages. The two are $1.1 billion CGM Mutual, a balanced fund (the No. 3 fund in its category for the past 10 years with a 13% average annual gain), and his newest entry, $69 million CGM Realty (described at left). All of Heebner's equity funds hold concentrated portfolios of 25 or fewer stocks--typically overlooked or underappreciated--that he figures will soar 20% to 50% in the next 12 to 18 months. (To reduce overall volatility, CGM Mutual regularly keeps a portion of its assets in fixed-income securities, recently 25%.)

Clearly, CGM funds are not for the fainthearted, as Capital Development's 23% loss showed in 1994. The cause: a Heebner miscalculation that was magnified by his gunslinging ways. In late '93, he had 60% of assets in cyclical stocks, expecting the economy to strengthen. In early '94, however, the Federal Reserve began a series of interest-rate hikes that pounded cyclicals. "1994 was a reminder of the consequences of not always being right," he says dryly. Heebner, a military history buff, recouped in typical fashion--he went on the offensive. In early '95 he put 45% of his assets in hot high-tech companies, including Micron Technology and Intel, and rode them to last year's outsize gain.

Now he is betting heavily on the leading companies of undervalued industries that he figures are ripe for turnarounds. His five favorites--all either in CGM Mutual's or Capital Development's portfolios--are described below. He expects the companies' profits to grow 15% or more by year-end '97, driving up their prices an average of 30% within 18 months. Yet the stocks are now selling at an average price/earnings multiple of 12.6, compared with the market's 17, based on his '97 earnings projections.

Chase Manhattan (ticker symbol: CMB; $72; 3.1% yield). In March, Chase Manhattan merged with Chemical Bank to form the nation's largest bank, with more than $300 billion in assets. Operating under the Chase Manhattan name, the New York City bank is expected to cut a whopping $1.7 billion in costs as it consolidates operations. "That alone will help spur annual double-digit earnings growth over the next two years," says Heebner. Chase will also use its added muscle to boost revenues in profitable businesses, such as commercial lending and securities trading. He predicts that earnings will climb more than 20% to $8.75 a share in '97 and Chase stock will hit $105 in 18 months for a 46% gain.

Southdown (SDW; $24; 0.8%). This $615 million (revenues) Houston cementmaker is profiting from the surge in commercial building and highway construction, up 22% and 32%, respectively, last year. The growing demand for cement has enabled Southdown to hike prices steadily, pushing up earnings 57% to $2 a share in '95. This year the company stands to reap gains from booming California, where nearly a third of Southdown's cement is produced. Heebner expects Southdown's earnings to climb 20% annually over the next two years and its stock to hit $33 in '97, for a concrete-solid gain of 38%.

Allstate (ALL; $43; 2%). As claims from 1992's Hurricane Andrew and the 1994 Los Angeles earthquake flooded in, financial disaster struck this $70.4 billion (assets) property/casualty and life insurer. The Northbrook, Ill. company eventually notched a $2.5 billion after-tax loss. But Heebner notes that Allstate is reducing its exposure in Florida and California by banning either sales or renewals of homeowners policies. And nationwide premium sales of its life insurance and auto policies are climbing 10% annually. Those new revenues figure to fuel earnings growth of more than 30% in the next two years, Heebner says, and to propel the stock 33% to $57.

Philip Morris (MO; $104; 3.9%). The stock price of this $70 billion company rebounded 20% last month after a high-profile class-action lawsuit seeking damages for smoking-related deaths was thrown out of federal court. (Prior to the decision, Philip Morris' stock had fallen 20% from its high of nearly $105 last March 6; for another bullish view on Philip Morris, see Wall Street Newsletter on page 58.) Although the class-action attorney may appeal the court's decision, Heebner predicts, "Their appeals won't be sustained." Moreover, he points out, U.S. tobacco profits now make up only 32.6% of Philip Morris' earnings, down sharply from 48.2% in 1990. Over the same period, foreign tobacco earnings have risen 30.1% from 16% of overall profits. "By next year international tobacco will contribute more than one-half of the company's tobacco profits, compared with 33% for domestic tobacco," he says. Meantime, he expects Philip Morris' lush $10-a-share cash flow to fuel an 80' dividend increase to $4.80 a share by August. He expects that hike, combined with 18% annual profit growth, to lift the stock 15% to $120.

American International Group (AIG; $98; 0.4%). With $145 billion in assets, this New York City company gets nearly half of its $27 billion revenues from overseas sales of property/casualty and life policies and financial services. In fact, Heebner notes that aig's consistent 15% earnings growth during the past five years is largely due to its aggressive marketing abroad. Last year, for example, the company raked in $50 million in individual life insurance sales in Hong Kong, where aig holds a 90% market share. Heebner expects earnings to rise 15% to $7 a share in '97 and aig shares to reach $113, an almost insurable 15% gain.

All Stock Data As Of May 24