(MONEY Magazine) – No doubt most readers were skeptical when I predicted in MONEY's July 1994 issue that Americans would make a bundle in the new, post-apartheid South Africa. After all, Nelson Mandela had just been inaugurated president, raising investors' concerns that this bountiful nation of 40 million people would be less prosperous under black majority rule (75% of South Africans are black). Furthermore, why bother with a faraway country when bargains were then so plentiful on the New York Stock Exchange? MONEY, you may recall, was boldly proclaiming that the Dow could rise 33% to 5000 before the end of this decade. Bingo. The Dow has since soared an incredible 53% to 5736. What became of the 12 South African stocks recommended in my article? Over the same period, they have risen an average of 62% in dollar terms. That compares with a 26% rise overall for the Johannesburg Stock Exchange (JSE), the world's ninth largest in total value. The dozen picks also beat the two-year, 44% return of $130 million Southern Africa Fund, by far the top performer among three closed-end funds that invest mostly in JSE stocks and trade on the NYSE.

Then last year I again praised South Africa's investment prospects after visiting Cape Town to interview Gerrit Smit, the talented market strategist at $31 billion (assets) Sanlam, the nation's No. 2 insurer. Did you check out Smit's five stock picks in our May 1995 issue? At last count they had returned 38% as a group in dollars, compared with the Dow's 38% and the JSE's 2% decline. What's more, both of the winning portfolios that I described have weathered a 15% fall in the dollar value of the South African rand since mid-February. (A stronger dollar reduces returns that Americans earn overseas in foreign currencies; a weaker dollar inflates those returns.) A month before the rand's sell-off, the 12 picks from '94 were up an average of 102%, while Smit's five favorites in '95 were ahead 57%.

Now I'm back from South Africa for the third time. And I'm still convinced of its enormous potential for profit on a continent starved for progress. How much? Over the next 12 months, the 12 South African stocks recommended below seem poised to appreciate 40%, on average. One impetus may be mighty Merrill Lynch. It's aiming by year-end to offer its brokerage clients, whose accounts total $731 billion, research on many of the 300 South African stocks covered by Johannesburg broker Smith Borkum Hare, a 1995 acquisition. To stay ahead of the herd, I canvassed my investment sources in Cape Town, Johannesburg and London, a global clearinghouse for many of the JSE's 600-odd stocks. About 120 also trade in the U.S. as ADRs (American Depositary Receipts). The experts generally agreed on these key points:

--The rand was unduly inflated. Estimates of its year-end '95 overvaluation, based on purchasing power, range from 10% to 20%. One culprit was a deluge of foreign capital. Foreigners' net purchases of JSE stocks and bonds last year multiplied fifteenfold to $4.3 billion. All currency traders needed to prick this bubble were rumors, since discredited, that 77-year-old President Mandela was ill and that Chris Stals, the tightfisted central bank chief, would resign. To shore up the rand, Stals was forced to raise interest rates, boosting yields on government bonds three percentage points to 16.4% and further eroding investor confidence. But I think that no one has a clue where currencies are going. Recall that the dollar plunged 20% against the yen in the first four months of '95. Today the dollar and Dow are both roughly 30% higher. Go figure.

--Devaluation won't derail growth. True, higher interest rates initially will dampen consumer and capital spending, slowing real economic growth this year to around 3.5%, down from the 4% to 4.5% many forecasters envisioned in January. (By comparison, MONEY sees U.S. gross domestic product expanding just 2% in '96.) But a weaker rand will also spark export booms, particularly in the crucial mining sector, about 8% of GDP, and in agriculture (5%). Influential economist Brian Kantor of the University of Cape Town sees exports, which rose 14% in '95, accelerating about 22% this year and next. Another big beneficiary is tourism, a font of entry-level jobs and some 3% of GDP, notes economist Rudolf Gouws of Rand Merchant Bank in Johannesburg. These net gains could augment GDP growth in '97 and beyond as much as 0.75 of a percentage point annually.

--Overlooked gems can still be found. My sources sifted through their portfolios to recommend 12 such stocks that figure to rise 20% to 53% over the next 12 months, based on today's exchange rate of 4.3 rand per dollar. Seven trade as ADRs over the counter in the U.S. The others can be bought on the JSE via major American brokers (commissions typically mirror those on U.S. stocks). Prefer a fund? Top-ranked Southern Africa (ticker symbol: soa; $16) sells on the NYSE at a 20% discount to its $20 net assets per share. Or consider $90 million New South Africa (NSA; $14). Over the past two years, this closed-end fund returned 30%. It trades on the NYSE at an 18% discount to NAV. Here are the most promising themes for U.S. investors:

--Prospect for 35% from three miners. You needn't be a goldbug to be upbeat on South Africa's diversified mining companies following the rand's dive. Their output of bullion, diamonds, manganese, nickel, platinum and other industrial metals is priced in dollars. But their fixed costs are in rand. So mining companies suddenly are enjoying 15% price hikes in rand for metals that otherwise have stalled in dollars over the past year. In response, profits this year and next figure to handily surpass the roughly 20% growth rate that most analysts forecast for JSE companies overall. And if laggard metals were to start appreciating in line with the 15% spurt in Goldman Sachs' broad index of 22 commodities over the past 12 months, industry earnings gains could easily exceed 50% annually.

For wide exposure to this upturn, Sanlam's Gerrit Smit recommends Anglovaal (ANAVF; $34 per ADR; 1% yield). Its $3.9 billion annual sales are derived from diamonds, gold, manganese and the firm's 60% stake in $3.4 billion Anglovaal Industries (AVI), a conglomerate of food, beverage and glass-bottling businesses. "A weaker rand also benefits AVI by pushing up the prices of competing brands that are imported," notes Smit. He sees Anglovaal's profits rising 25% annually this year and next, elevating the ADR some 26% to $43 over the next 12 months. Also consider $2.6 billion Gencor (GNCLY; $3.75 per ADR; 1.3%) and $740 million Samancor (SMNCY; $12.75 per ADR; 2.1%), two mining picks of Carmen Maynard, Johannesburg-based manager of the New South Africa Fund. Maynard expects Gencor, which has diversified into stainless-steel and aluminum production, to increase its earnings 33% this year and 43% next. She thinks the ADR can rise 33% to $5 in response within 12 months. Samancor, which is 51% owned by Gencor, is the world's No. 1 producer of manganese and chromium alloys prized by manufacturers for their durability. Maynard believes profits will jump 84% in '96 and 14% in '97, propelling the ADR 45% to $18.50 in a year.

--Aim for 43% from four cyclicals. South Africa's abundant coal (9% of world reserves) is priced in dollars and exported to Europe and the Pacific Rim's fast-revving economies. Foreign demand is so strong that the Richards Bay coal-shipping port is considering a two-year project to expand capacity about 15%. Sanlam's Smit says he has been scooping up the grossly undervalued shares of $734 million Amcoal (ANAMY; $71 per ADR; 3.2%) in anticipation of devaluation-stoked earnings rising about 35% in '96 and 20% in '97. His 12-month target is $98, a projected 38% profit.

John Liackman, chief portfolio manager at $24 billion Absa Bank in Johannesburg, suggests another coal bet, $123 million Duiker Mining (DUKRY; $2 per ADR; 4.1%). This small firm's mines often are adjacent to Amcoal's, says Liackman, "making Duiker a likely takeover target of Amcoal's one day." Barring a buy-out in the next 12 months, he sees Duiker's earnings climbing 40% and its shares appreciating 38% to $2.75. Liackman also recommends $1.8 billion chemical maker AECI (AECLY; $5.50 per ADR; 3.5%), long the dominant supplier of explosives to the mining sector. What investors often overlook, he says, is AECI's leadership in fertilizer, which is exported in dollars and much in demand these days. Why? South Africa's withering four-year drought ended late last year, setting the stage for a 20% rebound in agricultural output in '96, forecasts Gouws at Rand Merchant Bank. Thus Liackman figures AECI's earnings can rise 25% this year and next, blasting the stock up 45% to $8 in 12 months.

Mark Breedon, London-based manager of the Southern Africa Fund, thinks the stock of $2 billion pulp and paper producer Sappi (SAPIY; $10.70; 3.7%) is an unrecognized bargain. Today's $10.70 ADR has fallen almost 50% from its May '95 peak around $21 in step with a global crash in high-flying pulp prices--down about 50% from an October high near $1,000 a ton. Breedon is betting that the surprising resilience of the U.S. and Pacific Rim economies will soon prompt paper distributors in these regions to rebuild inventories, triggering price rises in pulp, paper and forest-products stocks. Sappi would profit both as an exporter (16% of sales) and owner of U.S. papermaker S.D. Warren (41% of sales), which was acquired from Scott Paper in '94 for $1.6 billion. "If I'm right," says Breedon, "a year from now Sappi could be worth 70 rand ($16.25)," or 52% more.

--Target 40% from five growth stocks. All are JSE-listed companies that don't yet have ADRs--or share prices fully reflecting their values as fast-expanding businesses. Take $60 million M-Cell (Bloomberg symbol: MCE SJ; 3.25 rand/75'; no dividend). Breedon recommends this August '95 new issue as the only way to bet on South Africans' seemingly insatiable demand for cellular phones. "Cell phones weren't introduced locally until May 1994," he notes. M-Cell owns controlling stakes in privately held network operator MTN, which has 38% of the country's 530,000 subscribers, as well as service provider M-Tel with 80,000 subs. The rest of the market is controlled by the state-owned phone monopoly, Telkom. What might M-Cell fetch in a year? Based on projected cash flows, says Breedon, "I'm shooting for five rand ($1.15), or 53% more." He also likes the 25% annual earnings growth and plum media holdings of $327 million publisher Naspers (NPN SJ; 40 rand/$9.30; 0.3%). It owns 25% of M-Cell and 29% of M-Net, a popular pay-TV service, as well as newspapers and women's magazines. Breedon's 12-month target is 60 rand ($14), roughly a 50% profit.

Gerrit Smit's favorite small-cap holding is $283 million Waltons Stationery (WAL SJ; 9.60 rand/$2.25; 1.5%), a wholesaler that's successfully flogging office supplies to South Africa's burgeoning small business owners. He sees earnings gains of 32% this year, then 25% next, lifting the stock 44% to 14 rand ($3.25) in 12 months. Over that same period, Smit is counting on 25% earnings growth and at least a 20% gain on the stock of $24 billion Absa Bank (ASA SJ; 20 rand/$4.65; 2.5%), the leading lender to new-home buyers. He also recommends the products as well as shares of $400 million Stellenbosch Farmers' Winery (SFW SJ; 7.50 rand/$1.75; 2.4%). sfw and two other publicly traded firms, Distillers and KWV, produce first-rate but still affordable wines that foreigners increasingly are discovering. The labels include Backsberg, Klein Constantia, Meerlust and Thelema. Over the past two years, industry exports tripled to 70 million liters. "A weaker rand will help sustain that export momentum," says Smit. He thinks sfw's stock has the most appreciation potential. His 12-month target is 10 rand ($2.30), a 31% profit you can drink to.