(MONEY Magazine) – With their impeccable pedigrees, blue-chip companies are the royalty of the investing world. But recently, many seem to be in danger of losing their crowns. At a time when the market as a whole is down only 8% from its all-time peak, Coca-Cola has tumbled 23% from its 1997 high, Merck has fallen 18%, and Gillette has lost 14%.

Moreover, the outlook for 1998 doesn't appear much brighter. Given the current economic troubles in Asia and other international markets, multinational corporations won't be able to count on big earnings boosts from overseas. In addition, the U.S. economy is likely to slow from 3.7% in 1997 to about 2.5% next year, limiting growth in domestic profits (see the story on page 38). And to top it all off, blue chips are far from cheap. The 30 stocks in the Dow are trading at an average of 18 times estimated 1997 earnings. That's roughly a 13% premium over the Dow's 16 historical price/earnings ratio. The result? Nowadays, lots of investors are asking the same question about the stock market's royal blues that the British are asking about their own royals: Who needs 'em?

The fact is, blue chips should still be the cornerstone of your portfolio. "They have the characteristics that, over time, make stocks winners," says Charles Smith, managing director of J. & W. Seligman, an investment advisory firm in New York City. "These companies are No. 1 or No. 2 in their industry, have control over pricing and generate all the capital they need to keep growing." In short, they are stocks you can buy and hold for five years or longer.

Of course, you want to identify those blue chips that stand the best chance of outpacing corporate America's slowing profit growth. To find such stocks, we canvassed more than two dozen security analysts and money managers for recommendations. Then we winnowed their favorite blue chips to a group of eight that are expected to post at least 14% growth in earnings per share next year, or twice the amount that MONEY chief investment strategist Michael Sivy projects for the average company. The pros' top picks are listed in descending order of their projected 1998 total return (capital gains plus dividends), priced as of Nov. 7, and all are traded on the New York Stock Exchange.

The copy cat. Talk about irony: The success of Xerox (ticker symbol: XRX; recently traded at $75.25; 1.7% yield) lies in its ability to duplicate. Yet this Stamford, Conn. company with projected 1998 sales of $19 billion is busily creating a new image for itself as the dominant supplier of copiers and printers for the rapidly growing home-office market. In September, sporting its new look, the company announced that CompUSA will sell Xerox's new Document HomeCentre, which delivers professional-level color printing, copying and scanning, and Document WorkCentre, which integrates color printing with faxing, PC faxing, copying and scanning. The CompUSA deal doubles to 3,000 the retail outlets carrying Xerox products in the U.S. and Canada. That increased retail reach will help Xerox tap into the booming home-office market, which the industry forecasts will grow nearly 30% a year from $26 billion today to $54 billion by 2000. Oppenheimer analyst Rudolf Hokanson says Xerox could boost its revenues from this line of business to $4 billion annually by 2000, up from only $1 billion today. That works out to a compound annual growth rate of nearly 60% over three years.

In addition, Xerox is redoubling its efforts to hold on to its core corporate clientele, particularly its production publishing unit, which is growing at a rate of 27% a year. Its new line of laser printers comes with a free one-year service contract. "That's something that most of its rivals aren't matching right now," says Tim Ghriskey, head of value stock research at Dreyfus.

Then there's Xerox's new DocuColor 40, a digital copier launched in March 1996 that churns out 40 color reproductions a minute, making it five times faster than any other copier/printer, while carrying a base price of $130,000--about half as much as a digital color press. This model helped digital-product sales spurt 26% in the third quarter of 1997. For all these reasons, Prudential analyst Alexander Henderson looks for the company to post earnings growth of 15% in 1998 and a share price of $100, for a total return of 35%.

The market leader of the PC pack. Already the world's largest manufacturer of personal computers, $29 billion Compaq Computer (CPQ; $64.25; 2%) is adding customers faster than a T1 line connects your computer to the Internet. In the third quarter of 1997, the Houston company shipped 19% of the 8.4 billion domestic PCs ordered, compared with 13.5% a year earlier. At the same time, the firm boosted its share of global PC sales to 14.3%, up 3.5 percentage points from the year before. What makes Compaq so popular? "The PC business is a tough one, but because Compaq is the No. 1 PC company, it has leverage when it comes to purchasing and brand-name recognition when it comes to sales," says Goldman Sachs analyst Richard Schutte. "That's a winning combination."

Compaq now has a two-pronged approach in place to capitalize on the 15% rise in PC demand that the Semiconductor Industry Association expects in 1998. First, in July the company launched a build-to-order manufacturing process to challenge rivals like Dell and Gateway 2000, which have long been successful with this approach. The build-to-order process allows corporate customers and retailers to mix and match features from an array of models to get a machine tailored to their specific needs. The computer is not actually built until the order is placed, which enables the company to keep product inventories low. Savings are passed on to consumers. For example, Compaq's new build-to-order Deskpro 2000 models are as much as 28% cheaper than similar Hewlett-Packard machines.

At the same time, through acquisitions such as the $3 billion purchase of Tandem Computers in August, Compaq is expanding its position in the corporate market for complex computer networks. The combination of new products and a boardinghouse reach for market share have David Wu, an analyst at ABN Amro Chicago, calling for earnings growth of 26% in 1998, booting up the share price to $85, a total return of 34%.

The giant in the medicine cabinet. Some 20 of Warner-Lambert's (WLA; $138; 1.1%) products rank first or second in their market categories, including Dilantin (the world's leading treatment for epilepsy), Benadryl antihistamine, Sudafed decongestants, Listerine mouthwash and Lubriderm skin-care products. But in 1998, this $8 billion Morris Plains, N.J. drug company will be telling "a two-product story," says analyst Jami Rubin at Schroder in New York City. The products in question: Lipitor, a cholesterol-lowering agent aimed at the 26 million Americans who need drug therapy to get their cholesterol levels down, and Rezulin, a treatment for Type II diabetes, which afflicts more than 15 million people in the U.S.

Lipitor, which hit U.S. pharmacy shelves in February, has already captured a 27% share of new prescriptions for cholesterol-reducing drugs. And with sales expected to top $1.4 billion in 1998, up from $750 million in '97, it is on track to become the most successful new drug ever introduced in the U.S. As for Rezulin, Merrill Lynch analyst Richard Vietor is looking for sales of at least $630 million in 1998, up from $400 million this year. "Within five years," he says, "we think Lipitor will be a $3 billion-plus drug, while Rezulin could hit $1.3 billion in sales." Given this one-two product punch, Rubin says, Warner-Lambert will be the fastest-growing company in the health-care industry in 1998, with earnings gains of 35% over the next 12 months. She expects the stock to shoot up as high as $180, for a total return of 31%.

The cost-conscious shopper. Like a homemaker clipping coupons from the Sunday paper, Kroger (KR; $33.50; no yield) is always scouting for ways to cut costs. The $27 billion Cincinnati grocer is the nation's largest supermarket chain, holding the No. 1 or No. 2 position in 26 of its 28 largest markets. Since 1995, it has invested $70 million in projects to reduce spending on distribution, transportation and storage. It has consolidated many of its warehouses and begun to coordinate grocery purchases across entire regions rather than allowing individual stores to buy from local wholesalers. "Buying in bulk should result in better pricing deals, which will boost Kroger's profit margins," says Phil Schettewi, manager of Loomis Sayles' Strategic Value fund.

Between 1997 and 1999, Kroger also expects to invest up to $800 million annually to build, expand or acquire stores and increase its square footage by nearly 6% a year. As a result, even though low inflation has kept food prices stagnant, Kroger's total sales during the third quarter of 1997 were up 4.7% from a year earlier, to $7.7 billion. That kind of performance has Smith Barney analyst Gary M. Giblen predicting a 19% earnings increase in 1998 and a $42 share price, for a total return of 25%.

The handyman's special. Houses built before 1980 account for 86% of the U.S. housing stock, which means that some 75 million older homes need new roofs, siding, plumbing, wiring, painting, papering--you name it. That's why the Home Improvement Research Institute projects that industry sales will hit $167 billion by 2001, up from $135 billion in 1996. And benefiting from that favorable trend is Home Depot (HD; $56.75; 0.4%), the $30 billion do-it-yourself retailer. Its roughly 559 stores across the nation stock more than 50,000 kinds of building materials, home improvement supplies, interior-design items and lawn products, and have 14% of the market nailed down.

Not that the Atlanta company plans to stop there. By Jan. 31, 1998, Home Depot will have opened 111 new stores over a 12-month period in fast-growing states such as Florida, Georgia and North Carolina, helping it toward its goal of having 1,100 stores by 2000. "They're taking business away from the mom-and-pop outfits by going into underserved areas and providing customers with topnotch service," says Gary Dennis, an analyst at J.C. Bradford in Nashville. Moreover, Home Depot is expanding into every corner of the home improvement market. Its five Expo Design Centers, ranging from 80,000 to 145,000 square feet, sell upscale interior-design products like hand-painted Italian marble tile and also offer professional design consulting services to customers undergoing major home renovations. Thus Gary Balter, an analyst at Donaldson Lufkin & Jenrette, anticipates earnings growth of 25% in 1998, driving the company's share price to $70 for a total return of 24%.

The not-so-accidental tourist. Taking its cue from a more conventional kind of phone company, AirTouch Communications (ATI; $39.25; no yield), the San Francisco provider of worldwide wireless-communications services, is reaching out to touch someone--the citizens of Europe. Only about 10% of that continent's inhabitants use cellular phones, compared with 20% of the U.S. population. So AirTouch is boosting the number of customized phone plans it offers to European customers, like the prepaid service plan it began offering this year in Italy and Spain. As a result, the $4 billion company added 366,000 customers to an international pool that now tallies 2.6 million--vs. 3.9 million in the U.S.--and its third quarter of 1997 was the best ever for international sales.

Analysts expect the company to maintain this kind of momentum because, says Jack Reagan of Legg Mason Wood Walker in Baltimore, "It is in very stable countries where government regulation of the industry keeps competition low and, therefore, the cost of cellular service high." Meanwhile, Bear Stearns analyst David Freedman notes that AirTouch will lose no time entering local European cellular businesses that are about to be deregulated and will allow private cellular companies to offer subscribers additional services. In fact, Reagan says, "AirTouch's international portfolio is the growth engine that will keep the company expanding at double-digit rates through 2005." For the next 12 months, Reagan is calling for 45% earnings growth and a target price of $45, for a total return of 15%.

Everyman's financier. It's getting a bit crowded under the trademark red umbrella of Travelers Group (TRV; $74.25; 0.8%), now that investment banker Salomon Bros. is squeezing in beside the Smith Barney brokerage, Travelers Property Casualty and Travelers Life & Annuity insurers, and Primerica Financial Services, the mutual fund purveyor. The New York City financial services company now has assets of about $400 billion. "Travelers' management has proved it knows how to buy and integrate assets effectively, and we expect it to do the same with Salomon," says Kathleen McCarragher, a money manager at Weiss Peck & Greer in New York City who specializes in large-company stocks.

The new Salomon Smith Barney investment house is one of the largest securities firms in the world, with nearly $200 billion in assets under fee-based management. Eric Berg, an analyst at Oppenheimer, notes that with Salomon, Travelers now has another outlet for cross-selling its diverse line of products. Smith Barney brokers already sell Travelers life and annuity policies, while Primerica agents hawk property and casualty insurance. Moreover, Salomon is one of the world's leading bond traders, deriving most of its profit from investing in global debt markets. As more overseas industries privatize, Salomon Smith Barney can expect to underwrite a good share of the additional equity.

Berg calculates that the Salomon acquisition could help boost 1998 earnings for overall growth of 20%. He figures that could push the share price to $85, for a total return of 15%.

The floating hotels. You wouldn't think it, but cruise lines start targeting people as young as 25 with a household income of $20,000 or more for customers. Fortunately for Carnival Corp. (ccl; $49.25; 1.2%), that market is almost half the U.S. population. Even so, only about 7% of the general population has actually set sail. To boost that paltry number, the $2.6 billion cruise ship and tour operator is "continually enhancing its fleet, adding innovations that attract travelers," says Smith Barney analyst Jill Krutick. For example, the Miami company offers a spa menu with healthy food selections that are low in calories, fat and sodium, and in December 1998 it will christen the world's first smoke-free cruise ship. In addition, Carnival--which has 34 ships plying routes to Alaska, Asia, the Bahamas, the Caribbean, Europe, Hawaii, the Mexican Riviera and the Panama Canal--is offering the following guarantee on some of these routes through 1998: If you're dissatisfied with your cruise, you can disembark in the first non-U.S. port of call and receive a refund for the unused portion of your cruise fare, as well as a free flight back to the ship's home port.

Such moves have increased advance bookings for the first half of 1998 from the same period in 1997. And analysts like Krutick think Carnival can see exciting growth overseas, now that the company owns a 50% stake in Costa Crociere S.p.A., the largest cruise operator in Europe. A scant 2% of Europeans take cruises. In addition, Carnival owns a portion of Airtours, one of the United Kingdom's leading travel and tour operations. "Carnival has proved it knows how to expand its customer base in the U.S., and the same approach should work in Europe," says David Anders, an analyst at Credit Suisse First Boston in New York City. That's why he believes Carnival's earnings will rise 14% in 1998, letting the share price cruise to $55 for a total return of 13%. With that in the offing, shareholders might just find themselves humming "God Save the Queen."