(FORTUNE Magazine) – Before mulling over what he likes in a stock, Eliot Fried, 53, thinks about what he likes, and dislikes, about the economic outlook. ''Because I'm shooting at a stock price some months out,'' he says, ''my basic consideration is what's going to happen to the economy.'' Since he believes it will get stronger, he picked such economically sensitive stocks as Dow Chemical and American Airlines for his portfolio. The dollar's depreciation already has spurred Dow's exports, he says, while American Airlines, formally known as AMR, is revving up for a fast takeoff on the strength of a firmer market and higher fares. Fried is sticking with another economically sensitive selection, Intel, a loser in his portfolio for last year's Challenge. ''We had the same type of forecast,'' says Fried. ''We expected the economy to swing around in the fourth quarter of 1985, and it didn't.'' As a result, Shearson placed No. 4. So you're not talking about a sluggish economy next year? We're talking about modest growth, with little concern about inflation and with interest rates not moving significantly higher. Why American Airlines? American has to be the premier airline company. It has a very aggressive management that is expanding the company from within, as opposed to merging with other airlines. It has the premier computer reservation system in the industry, a lot of cash to buy the equipment it has on order, and union contracts that are clearly favorable. If you superimpose all that on improving rates and strong traffic, you're going to make a lot of money. Do you have some numbers? Numbers, you want numbers? Having been an airline analyst, I can tell you very honestly there are no such things as earnings estimates, just guesstimates. If the fuel price goes down 1%, earnings go up. If passenger yields -- the average fare per mile flown -- go up 1%, earnings explode. Anyway, our analyst's guess (and he's very good) is $5 a share in earnings this year and $5.75 next. But the $5.75 could be $6.50 or $7. Dow Chemical must be among the few companies that have been able to exploit the dollar's depreciation. That's true. The company's export business has improved as the dollar has come down. Our analyst has modestly raised his estimates for this year and next in the case of several chemical companies, including Dow. He has raised the estimate for Dow by 15 cents a share for next year because of exports. And we've just added this stock to our recommended list. How important are the exports to Dow? They make up 30% of sales. We've seen a turn in the export business, but that's a small consideration. The bigger bet is that the U.S. economy is going to improve late this year and early next year and these people are going to be able to raise prices and earn considerably more. We estimate the earnings at $4 a share this year and $4.65 next. What about your other economically sensitive stocks, Digital Equipment and Intel? The kind of improvement we're going to see really won't benefit sensitive industries like steel or paper as much as technology, which could be a leader. I've been singing that song for a while, and Digital is doing quite well. Intel is doing exactly the opposite. Digital's business, essentially computers, has turned already. I think Digital has some excellent equipment, its share of the market is going to increase, and it is going to have dramatic earnings improvement over the next two years. Digital earned $4.81 a share for the fiscal year ended in June. Our estimate for fiscal 1987 is $5.90. While we don't have an estimate yet for fiscal 1988, I'm sure it will show 20% to 25% growth. The stock, around $90 a share now, is very reasonable. It should sell at a significant premium, say 20 times earnings. I also think you're going to see significant improvement in IBM in three to six months. I'd still rather go with Digital, at the moment. I had IBM in the portfolio last year and made some money but shifted to Digital because our perception is that the stock has more promise. Intel was your laggard last year. I'm still a believer. Intel to me is the premier company in the semiconductor industry. It is very well financed, it has a lot of cash, and it has excellent products. It is not a generic semiconductor manufacturer. It is a special ''exotic'' semiconductor manufacturer. And once again Intel has a couple of exotic new products -- such as a 32-bit microprocessor and a new high-resolution graphics co-processor -- that should be very successful as soon as the basic computer business turns around. The company may lose money in the next quarter, but if I'm right about the economy, Intel is going to do very well. Once the turnaround in the computer industry is in sight, the tendency of stocks like this is to go up 50% to 75%. Intel could go from $18 a share to the high 20s, just like that. I'm expecting it to happen this year. But I was also expecting it to happen last year. Hasn't Intel trimmed its operations sharply? Well, it had to. That whole industry has gone through a depression. Intel has closed plants and laid off people, but it hasn't cut research and development. It continues to turn out exciting products. We expect the company to begin showing profits in the next couple of quarters. If that happens, and investors get a bit more optimistic about the industry, you'll get a big move in Intel's stock price. I'm going to hang on with this one. What about Eli Lilly? Lilly is my drug play. I have one every year. Last year it was Upjohn, which did very well. And Lilly is a similar story. A magnificent story: Earnings grow 12% to 15% a year. Yet Lilly has not been as successful with new drugs as others in the industry. Now it appears that its research is coming to fruition. The company has a series of exciting new products coming out. The real key is Prozac, an antidepressant drug that has an interesting side effect. Tests have shown that taking this drug causes people to lose weight. It may even lessen an individual's desire for tobacco and alcohol. None of these things has been proved, but if Prozac fills half its potential it will be a blockbuster, and Lilly's earnings will grow at more than the normal rate. I think Prozac will be cleared as an antidepressant by the end of this year, and people will get excited about it. Lilly's earnings estimates are about $4.10 this year and $4.60 next. I think Lilly is an awfully cheap stock. It's selling for $63 a share, down from $83, because of profit taking. I think it's a perfect opportunity. You mention profit taking. Won't there still be a lot more selling this year because of the tax bill? Oh yes, and not just because of tax considerations. The market has run up so fast that institutions become nervous whenever the market gets hit on the head. When they have profits, they take them quickly. The drug industry was a perfect place for profit taking. Are big market swings and tax changes affecting your strategy? Only in this way: I've been very successful in the stock market -- I say that modestly -- but I've never been a successful trader. I've been successful really on a buy-and-hold basis. Part of my philosophy was the result of how taxes worked in this country. That has changed dramatically. Next year, when there's no six-month holding period for capital gains, I'm going to be much more willing to take profits on a shorter-term basis. If something goes from $18 a share to $26, my inclination would be to sell out at that point. Other portfolio managers are also changing their thinking? That's right. We'll see people selling much more rapidly. I think we're going to have extended and accentuated market volatility, and in 1987 we're going to have to be very quick on the trigger.

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