(MONEY Magazine) – THIS MONTH:

--H&R Block's daily double --What now for the dogs of the Dow? If the Bull market of the past decade has proved anything, it's that investors love to follow the leaders: Eager buyers pushed the benchmark Dow Jones industrial average--which includes no less than 20 industry leaders among its 30 blue-chip companies--up 65% over the past two years. That compares with 53% for Standard & Poor's index of 400 mid-size-company stocks and just 45% for the Russell 2000 index of small-company shares.

Unfortunately, though, the focus on the bluest of blue chips means that many industry powerhouses are also No. 1 in another category: valuations. Soft-drink giant Coca-Cola, for example, has a stock price/earnings ratio of 36, and software leader Microsoft boasts a sky-high P/E of 50. Meanwhile, the average stock in the S&P 500, a far broader index than the Dow, has a P/E of just 22, based on the past year's earnings. The result: Identifying bargains among industry leaders today is like trying to find a politician who's really in favor of campaign finance reform.

But this obsession with No. 1 presents savvy investors with an alternative opportunity for big profits. By ignoring the industry captains in favor of solid also-rans--we call them light blue chips--you can often turn up companies with room for growth in profits and stock price. Explains Joseph Battipaglia, chief investment strategist at brokerage Gruntal & Co. in New York City: "In industries where the growth prospects are good but the No. 1 company is overvalued, you can look to the stock of smaller competitors to outperform their larger brethren."

Mind you, buying a stock simply because it trades at a relatively cheaper price than another in its industry is foolish, as one of our cover stories on page 90 explains. That's why in our effort to find the best light blue chips today, we asked 10 securities analysts to identify solid second-tier companies in strong industries whose shares are trading at a significant discount to the No. 1 players in their field and whose particular growth prospects are strong. The four stocks they recommend--which boast estimated average annual profit gains of 17% over the next five years vs. 6% for the S&P 500--sell for as much as 42% less than the leaders in their markets. The four, all traded on the New York Stock Exchange, are listed here in order of potential 12-month total return:

--Baker Hughes (ticker symbol: BHI; recently traded at $44.25; 1% dividend yield). With worldwide demand for oil expected to rise 12% over the next three years, investors have bid up the price of Schlumberger--the leading provider of oilfield services, with 1998 estimated sales of $12.2 billion--by 62% since January. No. 2 Halliburton is up 66%. Oddly, the share price of $4.7 billion Baker Hughes, No. 3 in the business, has risen by just 28% over the same period even though 87% of the Houston company's revenues come from oil services vs. 68% for Schlumberger and 58% for Halliburton. As a result, Baker Hughes' P/E of 27 is 28% lower than that of Schlumberger.

Johnson Rice analyst Joe Agular in New Orleans thinks Baker Hughes is poised to catch up: The company has increased employment in its oilfield operations by 5%, enabling it to bid for more contracts and increase market share. Moreover, Baker Hughes is spending $200 million this year to integrate the finance, administrative and marketing chores of its six divisions. Such moves, Agular thinks, will translate into savings of $100 million a year starting in 2000 and will help Baker Hughes produce 20% average annual earnings gains through 2002. Little wonder that Morgan Stanley Dean Witter analyst John Lovoi in Houston thinks the company's stock could strike $60 a share by next fall, for a total return of 37%.

--Central Newspapers (ECP; $71.75; 1.2%). Extra! Extra! Read all about it: The newspaper industry is pressing ahead. Over the past 12 months, earnings in the industry have grown 48%, thanks largely to a 30% drop in newsprint prices in the first half of this year and cost-cutting efforts at a number of the nation's dailies. Leading that charge is $750 million Central Newspapers, which owns the Arizona Republic, Indianapolis News and Indianapolis Star along with several smaller papers around the country. In January, the Indianapolis company shut down the Phoenix Gazette in a bid to cut costs. Steps like this have helped boost Central Newspapers' profit margins to 12% this year, more than twice what they were five years ago.

Lower costs are only part of the story, however, as advertising sales have jumped almost 14% over the past year vs. 8% for the industry. Says Morgan Stanley Dean Witter analyst Doug Arthur: "Central has the strongest revenue growth in the industry, but it is still a bargain compared with other newspaper chains." Indeed, Central trades at just 17.6 times 1998 estimated per-share earnings vs. 19.2 for No. 1 Gannett and 22.3 for No. 2 Knight Ridder. Arthur thinks the stock could hit $88 in the next 12 months, for a total return of 24%.

--Maytag (MYG; $32.75; 2%). Want another reason to pity the Sad Sack Maytag repairman? Even though this $4 billion Newton, Iowa company has one of the most recognizable names in the appliance business, its stock still trades at a 23% discount to No. 1 Whirlpool. Reason: After a faltering attempt at global expansion in the late 1980s--which severely cut profits--investors are only beginning to recognize the new Maytag. That company is now letting Whirlpool and No. 2 General Electric fight for business overseas while it focuses on the mature but healthy U.S. appliance market, which is expected to grow 2.5% a year for the next three to five years.

This year alone the company has introduced a half-dozen new products, including a new line of high-end refrigerators under the Maytag and Jenn-Air brands. Merrill Lynch analyst Jonathan Goldfarb says these higher-margin products should help boost cash flow to $318 million next year, enough to continue funding an aggressive stock-repurchase program. Prudential Securities analyst Susan Gallagher in New York City thinks the company's earnings will grow nearly 8% a year for the next five years, enough to attract investors and send the stock to $40 a share in the next 12 months, for a total return of 24%.

--Lowe's Cos. (LOW; $39; 0.6%). This $10 billion North Wilkesboro, N.C. firm is the second largest operator of home improvement stores, behind $24 billion Home Depot. The latter's share price is up a roof-busting 60% so far this year as investors have zeroed in on the promising home improvement market, a segment of retailing that is expected to grow at a robust 5% annual clip over the next three years as aging baby boomers spend increasing amounts of money making their abodes more livable.

Lowe's--which sells for 21 times per-share earnings vs. Home Depot's 36 multiple--is moving quickly to capitalize on this trend. The company will have 600 stores by the end of this decade, up from 402 at the close of 1996. Its growth strategy is two-pronged: Attack Home Depot in larger markets such as Atlanta and Dallas with 150,000-square-foot superstores, while continuing to focus on small rural areas, such as Huntersville, N.C. and Galesburg, Ill., where half its stores are located and where the only competition comes from mom-and-pop hardware stores. PaineWebber analyst Aram Rubinson in New York City expects Lowe's earnings to grow by as much as 20% to 25% annually for the next three to five years, and Christopher Vroom, an analyst with BT Alex. Brown in San Francisco, thinks the company's share price will just about keep pace. His 12-month target price is $48, for a 24% gain.