(MONEY Magazine) – Given today's high-flying market, you might think there were no stocks left that could climb another 30% on top of the almost unbelievable 70% advance of the past two years. Testifying before the Senate Banking Committee in late February, Federal Reserve chairman Alan Greenspan went so far as to dismiss the belief that stocks could keep rising indefinitely as a "mirage." Nonetheless, some companies are ready for further major gains. Investors can find them by focusing on mergers and other corporate restructurings.

Today mergers are approaching manic proportions, even by the feverish standards of the past seven years. There were 32 proposed deals worth $3 billion or more in 1996, up from fewer than five a year between '90 and '92. And last year's mergers topped $658 billion in total value, vs. less than $200 billion annually in the early '90s. Moreover, major mergers continue to be announced, such as computer-networking giant 3Com's $6.6 billion bid for modem-maker U.S. Robotics in late February. "Merger fever is sweeping through the market," says chief economist Richard F. Hokenson at Donaldson Lufkin & Jenrette in New York City. In the late '80s and early '90s, companies were able to boost their earnings through cost cutting. Hokenson adds, however: "Today, companies have few places left to cut expenses and therefore have to look to external means, such as mergers, to sustain their growth."

Other forms of corporate restructuring are also in vogue, particularly spin-offs. In this strategy, a company packages ancillary businesses--perhaps even a subsidiary--as an independent company and gives the new stock to the parent firm's shareholders. The benefit: The original company can focus on its remaining businesses while off-loading some of its debt onto the new concern. As a result, stockholders often double their fun. The two pieces deliver bigger gains separately than the old stock could on its own. Among the well-known companies that have recently used this approach are AT&T, ITT and PepsiCo.

Buying a company that's being taken over before the deal is completed is extremely risky. Leave that to professionals known as risk arbitrageurs. That's because when one company buys another, it usually has to pay a premium of at least 25%. If the deal falls apart, the shares of the company being acquired usually plunge.

Nonetheless, there are three ways that small investors can profit safely from mergers and corporate restructurings:

--Buy stock in a company that is likely to be taken over before the deal is announced. This is the most speculative approach, since you have no way of knowing when--or even if--a takeover will occur. However, the strategy works as long as you pick stocks that you find attractive at their current prices even if a deal never takes place. The buy-out, if there ever is one, simply becomes a bonus.

--Buy shares in an acquiring company, if a merger will clearly lead to cost savings. Forget about CEOs' claims that combining two multibillion-dollar businesses will create those mysterious advantages known as synergy. A merger's real benefit is cost cutting. Combine two banks in the same town, and you can shutter any branch that's within a quarter-mile of another. Look for deals like that, even when you may have to wait more than a year for the cost cutting to boost the share price.

--Buy spin-offs after they're announced but before they actually occur. Few top managers are stupid enough to spin off assets that would leave the parent company weaker; thus the original stock usually benefits after a spin-off. Further, a newly created company generally fares much better once it is freed from corporate bureaucracy. In fact, academic studies have shown that in the two years after spin-offs become independent, their shares outperform those of comparable companies by as much as 20 percentage points.

Based on these three approaches, here are six stocks that analysts figure could rise 30% or more in the next two years. Moreover, all six are solid purchases even without a deal. The stocks are discussed in order of their potential returns.

--Comcast (ticker symbol: cmcsa; recently traded on Nasdaq for $17.25; 0.5% yield). With estimated 1997 revenues of $4.6 billion, Comcast is the third largest U.S. cable- television company, after industry giants Tele-Communications Inc. and Time Warner (this magazine's parent firm).

As the biggest of the mid-size cable-TV companies, Comcast is ideally positioned to benefit from the industry's continuing consolidation. In November, for instance, Comcast completed the acquisition of Scripps Co.'s cable systems for stock worth $1.56 billion. Scripps' 808,000 subscribers boosted Comcast's total customers to more than 4.3 million. "On average, Scripps' subscribers have paid $6.50 a month less than Comcast's customers. If the company can raise the Scripps systems' revenues to average levels, Comcast will get an additional $5 billion a year," says analyst Alvin S. Mirman at Commonwealth Associates, a New York City investment research firm.

In addition, most analysts believe that cable stocks, depressed for three years, are beginning to rebound. "The cloud over the industry is starting to lift," says analyst Spencer Grimes at Smith Barney, adding that the group could outperform the S&P 500 in 1997. The chief reasons: Cable companies are putting greater emphasis on management and customer service, and new revenue sources are developing, such as digital television and cable modems, which allow personal computers to communicate over cable-TV lines. In the next two years, Grimes thinks the stock could rise 51% to $26.

--PepsiCo (PEP; New York Stock Exchange, $33; 1.4%). "We were delighted when PepsiCo said it would spin off its restaurant business by the end of 1997," says analyst Jennifer Solomon at Salomon Bros. So were most other investors: The stock jumped 11% on Jan. 23, the day the Purchase, N.Y. soft-drink maker announced the spin-off. Why is splitting off the restaurants from the $34.3 billion company's soda and snack-food businesses a divorce made in heaven? Getting rid of the long-troubled restaurant division will allow PepsiCo to focus on international beverage sales, where the No. 2 cola-maker is losing ground to Coke.

In fact, both pieces of the company could be better off after the split. "The restaurants are turning the corner," says Prudential Securities analyst George E. Thompson. "Same-store sales are improving at both Pizza Hut and KFC, and they aren't getting any worse at Taco Bell." Overall, analyst Anton J. Brenner at UBS Securities sees 1997 shaping up as a strong year for all three of PepsiCo's businesses. "This could be the first year in memory in which beverages, snack foods and restaurants all report double-digit increases in operating income both domestically and internationally," he says. Brenner figures the stock could move up 45% to $48 within two years.

--Chase Manhattan (CMB; NYSE, $103.25; 2.2%). The last time the New York City bank now known as Chase Manhattan merged, its stock nearly doubled. In December 1991, Chemical Banking acquired Manufacturers Hanover. In the following two years, the combined banks--which kept the Chemical name--closed more than 80 duplicate branches and cut costs by a total of about $800 million. The result: The stock soared from $22 to $46 by late 1993.

In the hope of repeating that success, Chemical merged with Chase Manhattan on March 31, 1996 (and subsequently took the Chase name). The combination created the largest U.S. banking institution, with total assets of $335 billion. "It's my favorite stock because it's trading at a 20% discount to the average bank stock," says analyst George Salem at Gerard Klauer & Mattison in New York City. "Chase is the Rodney Dangerfield of bank stocks," he adds. "It don't get no respect."

During the next year or two, however, analysts think the merger could pay off handsomely. "Chase clearly doesn't deserve its low price/earnings ratio," says Prudential analyst Ruchi Madan. "It's the cheapest of the 50 largest bank stocks, but its long-term outlook is better than average."

"Merger-related cost savings are the key," says Salem, who calculates that the combined bank could save $1 billion during the next two years. He projects that earnings will rise 18% to $8.75 a share in 1997 and 17% to $10.20 next year. He sees the stock moving up 36% to $140 over the same period.

--Washington Mutual (WAMU; Nasdaq, $54.75; 1.8%). The largest independent bank in the Pacific Northwest, with assets of $45.6 billion, this Seattle institution bought Keystone holdings in December for about $1.7 billion in stock. "The acquisition of Keystone's American Savings Bank has transformed Washington Mutual into a West Coast powerhouse," says analyst Thomas J. Carley at Jensen Securities in Portland, Ore. In fact, the bank will now be California's second largest mortgage lender after Bank America. To top that off, in January, Washington Mutual completed the $79.5 million acquisition of United Western Financial, which has nine branches mostly around Salt Lake City.

"With its strong Northwest franchise and expansion into California, Washington Mutual is well positioned for growth," says analyst Steven R. Schroll at Piper Jaffrey in Minneapolis. Carley figures earnings could jump 14% to $3.80 a share this year and 18% to $4.50 in 1998. If the stock keeps pace with those gains, its price could increase 35% to $74 by the end of 1998.

--Union Pacific (UNP; NYSE, $60.25; 2.9%). The $3.9 billion acquisition of Southern Pacific in September 1996 has made Union Pacific the largest U.S. railroad, with estimated 1997 revenues of $11 billion. "This is a high-quality merger, and it's proceeding ahead of schedule," says analyst Steve Lewins at Gruntal in New York City.

"Union Pacific reported a 47% earnings gain for the fourth quarter of 1996, the best results of any U.S. railroad, largely because of cost savings from the merger," says Salomon Bros. analyst James J. Valentine. "Over the next five years, the company could save at least $800 million," he adds.

Lewins believes that these cost reductions could power Union Pacific's earnings growth by 15% annually in the next four to five years. And he sees the stock topping $80 within two years, a gain of at least 33%.

--General Dynamics (GD; NYSE, $68.50; 2.4%). In January, this $3.9 billion maker of submarines, destroyers and tanks in Falls Church, Va. acquired two businesses from Lockheed Martin for $450 million. The two divisions, which produce combat vehicles and gun systems, could generate $500 million in sales this year. "This transaction fit strategically and carried a good price as well," says analyst Pierre A. Chao at Morgan Stanley in New York City.

With U.S. defense spending budgeted to rise $27 billion in the next four years, there are still growth opportunities for financially strong defense companies. And even after the purchase of the Lockheed divisions, General Dynamics has more than $700 million in cash and no debt. "With its substantial cash, the company can afford to make more acquisitions and consolidate in heavy defense businesses such as armored vehicles, destroyers and nuclear submarines," says analyst Michael Bunyaner at Oppenheimer & Co. in New York City. He believes the stock could move up to $90 within two years, giving you a conservative way to earn a 31% profit from merger fever--and still keep your cool.

Reporter associate: Jennifer Zajac