Warner-Lambert, Compaq And More Almost all of our favorite blue chips in 1998 remain on course.
By Galina Espinoza; Penelope Wang; Duff McDonald

(MONEY Magazine) – Last year, in our Forecast issue, with markets rattled by the beginnings of the Asian economic crisis, we picked eight blue-chip companies that seemed likely to withstand the turmoil and, more important, deliver solid returns over the next five years. We think you can comfortably continue to hold seven of the eight.

Six of our picks--AirTouch Communications, Carnival Corp., Home Depot, Kroger, Warner-Lambert and Xerox--have performed as well as or better than expected, gaining 22% to 62% since Nov. 17, 1997 vs. 15% for the S&P 500. The top gain belongs to drug giant Warner-Lambert, thanks in large part to cholesterol-reducing agent Lipitor, which is expected to nearly triple its sales from a year ago to $2.3 billion this year. Despite its big run, Warner-Lambert still has the lowest price/earnings growth ratio in the blue-chip drug group, says Gruntal analyst David Saks. And it also has promising drugs for Alzheimer's disease and prostate cancer in the pipeline.

The laggards have been Travelers Group and Compaq. Travelers Group slid 35% down a bumpy road to its merger with Citicorp, which was completed on Oct. 8, creating a new financial services supermarket called Citigroup. We discussed the short-term risks and favorable long-term outlook for the new company in the Showdown column in our October issue. Compaq, hit by the world's economic slowdown, has fallen 13%. But with tech stocks recovering (see page 41), Compaq is certainly worth holding on to.

Carnival is a different story. Up 24% since we recommended it, Carnival is still poised to ride the wave of aging baby boomers demanding cruise travel. Still, with a slowdown in the U.S. economy looming at the same time that cruise companies are launching new ships and ordering more, many analysts expect the leisure industry to get slammed. Because Carnival's outlook for the next year or so is uncertain, consider taking your profits. --GALINA ESPINOZA

RISING STARS Our young fund managers got caught in the slump

February's "Five Young Managers Who Win Like Old Pros" highlighted a group of top-performing under-40 fund skippers who were good bets to outperform over the long haul. That may still prove to be the case, but just like the pros, the rookies were mostly hit hard during the market slump.

One of the worst showings was by Steve Romick of UAM FPA Crescent, who was down 10.8% for the year through Oct. 9, putting him in the bottom 10% of his category. Romick tries to limit risk by investing in a quirky mixture of undervalued small companies and high-yield bonds. Unfortunately for Romick, both small caps and junk bonds have slumped lately. "When the tide goes out on your markets, there's nothing you can do," Romick says. "But when small-cap stocks come back, I'll be fine."

John Bogle Jr.'s N/I Growth & Value plunged 18.9% in the third quarter. "We're still a bit ahead of our benchmark, which is the S&P midcap index," says Bogle. Nonetheless, he is fine-tuning the quantitative models he relies on.

Chris Davis of Davis Financial dropped 15.9%, as banks and financial services stocks got hammered. Davis still ranks in the top 10% of his peers. Not so Sarah Ketterer, co-manager of Hotchkis & Wiley International, which lost 18.4% and ranks in the bottom 30% of its category year to date. "As value managers, we did not own the high-flying blue-chip European stocks that performed best," Ketterer says. "But now those stocks have been slipping. We see plenty of opportunities for value ahead."

So far, the leading rookie is William Stromberg of T. Rowe Price Dividend Growth, down only 1.7% this year. "I was pleased with the fund's performance during the downturn," says Stromberg. "But I'm less pleased with the performance between February and June, when we lagged the market." Stromberg has been nibbling on beaten-down growth companies, including Linear Technology and Hewlett-Packard. "They pay only small dividends, but they are raising them regularly," he says. --PENELOPE WANG

PIERCING PAGODA Growing pains will pass

Investors who bought shares of Piercing Pagoda after we recommended the stock in May's "Small Wonders" are seeing holes in their portfolios. The company--which sells moderately priced jewelry in mall kiosks--has slumped since announcing in late September that earnings would fall short of estimates, largely because of problems integrating 100 locations acquired in July. The stock is off 56%, but don't bail out now. Sales looked strong in September, "and as for their ability to integrate acquisitions," says Stacey Stichter of Emerald Research, "this is really the first time they've ever stubbed their toe." At $13.25, Pagoda is trading at a mere 11 times next year's estimated earnings. --DUFF MCDONALD