(FORTUNE Magazine) – Are Wall Street analysts really worth listening to anymore? Right now investment banks and brokerages are struggling to put a value on in-house research. And their conclusions could lead to a radical change in the way they do business in the near future (see "Wall Street on the Run," page 106). But for the average investor, the question is this: Should I pay attention when analysts pick stocks? All too often, the answer is no.

Year after year, the evidence shows, most analysts fail at their prime objective: making money for their clients. Yes, they churn out reports on companies and industries, full of crunched numbers and cogent perspective. But when it comes to actually making timely stock picks--which is what, ostensibly, they are paid to do--analysts are flat-out bad. In 2003, the S&P 500 rose 26%, and the Nasdaq gained 50%. By contrast, the portfolio of the median Wall Street analyst, as judged by the recommendations to buy, sell, or hold the stocks that he covers, gained just 11% before commissions. In only two of 81 market subsectors would an investor actually have done better by listening to the analysts than by just buying and holding the same group of stocks. Think about that for a moment: As 2003 began, stock valuations were at their lowest level in years, and corporate profits were set to rebound. Yet the same analysts who said to buy at the top of the market in 2000 were telling investors to exercise extreme caution when handling equities. What more proof do we need that analysts, almost as a rule, get it wrong?

Sometimes, however, it's the rule that draws into sharp relief the exceptional. In the five years that we have been compiling our list of the best-performing analysts, it has become clear that certain researchers stand above their peers as stock pickers. Their names are always near the top of the rankings. Indeed, this year's lineup is dotted with repeat performers, such as Colin Devine, who covers insurance for Smith Barney, and Richard Chu, a computer analyst at S.G. Cowen. Their styles vary from contemplative to combative. Some work in regional brokerages and others at the white-shoe investment houses in the very heart of Wall Street. What they all have in common is a skill for spotting opportunities their peers routinely overlook. They have the knack.

For help in picking our 2004 All-Star Analyst team, we turned for the fifth year in a row to Zacks Investment Research, a leading collector of Wall Street information with a database that tracks the moves of nearly 3,000 analysts. Zacks scored every upgrade and downgrade and came up with rankings for the analysts in each market sector. (Sells were counted as short positions, and holds were calculated as cash positions, with performance tied to short-term government bonds.) We looked at performance over the past one-year and three-year periods to find consistent moneymakers. We also reviewed their research reports and interviewed portfolio managers to get a handle on their insight and candor. In the end we found ten All-Stars whose research is worth plenty.

To put their skills to use, we asked each analyst to give us his best idea for the coming year. (Our analysts' picks from last year are up an average of 32%, vs. the S&P 500's 21% rise.) The result is a diverse portfolio ranging from pure value plays such as Prudential Financial to more speculative choices such as Sun Microsystems, an ailing tech giant whose future is uncertain. Here, the top picks from the 2004 FORTUNE All-Stars.

Household products Andrew McQuilling, UBS Pick: Weight Watchers (WTW, $35)

The scenario couldn't get much rosier for household products companies. Consumer demand is strong. The global economy is improving. And a weakened dollar is bolstering foreign sales--and padding profits--for the likes of Procter & Gamble and Colgate. Plus, a range of new products will soon delight purchasers and add to revenue growth. Among the highlights: Gillette is introducing three new razors, including one that attaches to a handle that emits tiny vibrations to make facial hair stand up and provides a cleaner shave--at a much higher price.

The trouble is that with all this good news, virtually every analyst on Wall Street is touting the same group of stocks, driving up prices. That's why UBS researcher Andrew McQuilling is looking elsewhere. The three-time All-Star is also a fan of core companies like P&G and Gillette, mind you. But in keeping with his contrarian approach, the analyst's attention is focused on a company that is struggling right now. (For more on how McQuilling picks stocks, see box.)

Right now McQuilling's top pick is Weight Watchers (WTW, $35), a stock that's trading at a 52-week low and is roundly despised by Wall Street. It would be hard to find a less of-the-moment company. Weight Watchers, which operates classroom-based diet franchises, has been absolutely clobbered by the popularity of the Atkins diet. The low-carb frenzy is the polar opposite of the Weight Watchers philosophy of smaller portions and a sustainable diet for people who don't think it's realistic to completely give up sugar. Atkins has curtailed enrollment in Weight Watchers and cut deeply into the company's profits.

But McQuilling insists that the low-carb mania has peaked. "Have you ever tried low-carb bread?" he says. "The more people that do that, the more people will realize that low-carb is an unsustainable way to live." He says that data he has compiled show that the number of Americans on a low-carb diet has fallen 25% since January. It could be that five million dieters met their goals and are happy. Or perhaps they have discovered that a protein-only diet can get boring. So how does that help Weight Watchers? First, given that 65% of American adults are classified as overweight (up from 56% in 1990), there is still a huge market for diets--and for Weight Watchers to tap into. And despite all the negative news, Weight Watchers is still bringing in lots of cash it can use to finance growth through marketing. McQuilling projects that it will generate $2.10 per share in free cash flow in 2003.

Defense and aerospace Joseph Campbell, Lehman Brothers Pick: EADS (EAD FP, $24)

The war on terror is beginning to fracture defense and aerospace into two sectors. Defense suppliers--particularly those that make fighter jets, weapons systems, and armored vehicles--have been bolstered by the jump in the Pentagon's budget, from $287 billion during the Clinton presidency to Bush's current Iraq-bloated $430 billion outlay. But commercial aerospace has suffered. Fears of terrorism have kept travelers away, and surging fuel prices have further eroded profitability. There is such a glut of airplanes now parked in hangars--roughly 2,000 at the most recent count--that orders for new jets have fallen 60% below their 40-year average. It's no wonder most analysts are telling investors to stay out of commercial aerospace and focus on companies that benefit the most from military spending.

The exception is two-time All-Star Joseph Campbell of Lehman Brothers. When FORTUNE readers last heard from Campbell, 58, he was arguing that Boeing was cheap. At the time, shares were at a 52-week low and business looked bleak. But in the 12 months since Campbell gave us that pick, Boeing has gained 54%. Campbell himself earned a 16% return on his recommendations in 2003 and once again ranked as the most consistent stock picker in the sector. And he continues to veer away from the consensus.

This year Campbell is telling investors to avoid or sell stocks dependent on huge increases in military spending. His argument is that current budgets--which are on a par with Vietnam-era military levels after adjusting for inflation--are unsustainable. Whether or not President Bush remains in the White House for a second term, the country faces a budget deficit that will have to come down, either through tax hikes or spending cuts. Indeed, where Campbell would put money is in the downtrodden, forgotten commercial-aerospace side of the sector. There's no denying that the business is still weak and that U.S. carriers in particular are teetering near bankruptcy. But demand is swinging upward globally, with orders from fast-growing China driving the rebound.

That points to European giant EADS (EAD FP, $24), parent of Airbus. As you might expect from the counterintuitive Campbell, more than half of the analysts who follow the company rate it either a sell or a hold. In fact, EADS--which derives two-thirds of its sales from commercial jets and the remainder from defense sector spending--just disappointed Wall Street with its quarterly results when it reported that orders for Airbus were weak. Campbell predicts an earnings turnaround, though, led by a sharp uptick in profit margins driven by a reduction of research costs. Airbus is readying itself to challenge Boeing's 747 with the launch of its new double-decker 555-seat A380 jet. That project alone has been eating up as much as $2.6 billion in annual expenses. (Orders for 129 jets have already come in.) Absent those costs, the savings will drop to the bottom line. EADS currently trades at a reasonable 20 times its trailing 12-month earnings. And Campbell expects profits to at least double by 2008. One practical drawback for U.S. investors is that EADS has yet to list itself as an ADR (American depositary receipt). If Campbell's take is right, however, it might be worth finding a broker who can buy shares of the company on the French exchange. Says the analyst: "We're at the beginning of a recovery that is clearly at hand."

Financial services Chris Blum, Edward Jones Pick: Bank of America (BAC, $83)

If you want to know why some investors are worried about the prospects for financial services stocks, just look at the terms of the Google IPO. The company's decision to auction shares rather than let underwriters place stock with their favorite clients means that investment banks are losing out on millions of dollars in additional income. The deal effectively halved Wall Street's payout. To be sure, it is a great thing for investors and companies ready to test the equity markets. But it underscores the trend of diminished fees--and tighter profit margins--in the financial business. Indeed, all across Wall Street, bankers, analysts, and traders have seen their take of the action come down dramatically despite a resurgent market.

Now add this concern: Rising interest rates often hurt financials, particularly the retail side of the business that sells mortgages and credit cards. What's the best way to play the uncertainty of this opaque sector? For the answer we turned to a no-nonsense researcher: Chris Blum of Edward Jones. Blum, 36, is a former FDIC bank examiner who works in St. Louis, far from the Manhattan media spotlight. But while he doesn't attract a lot of attention from producers on CNBC, he has beaten his peers consistently over the past three years. In 2003 he gained 29%, vs. 9% for the average sector analyst. That followed impressive positive returns during the difficult market in 2001 and 2002.

Blum believes that investors should be selectively buying the biggest financial services companies. They tend to be more diversified than smaller banks and therefore less vulnerable to declines in a particular sector such as mortgage lending. A safe choice now, he says, is Bank of America (BAC, $83). Though BofA is undertaking a $48 billion acquisition of Fleet--a deal that was widely criticized and sent shares down 12%--Blum reckons that BofA CEO Ken Lewis has a knack for making mergers work. Lewis was brought in to clean up the mess created by the late 1990s merger with NationsBank. (For more on why FORTUNE thinks the Fleet deal can work, see fortune.com. Blum also likes the way that Lewis has aggressively gone about settling litigation related to the mutual fund trading scandal. Meanwhile, his strengths as a manager have boosted BofA's pretax profit margins above Citi's. The company's generous dividend (it currently yields 4%) is an added sweetener for investors.

Technology Richard Chu, S.G. Cowen Pick: Sun Microsystems (SUNW, $4)

For tech investors, it all comes down to spending. How much money will companies and consumers fork over for computers, servers, cellphones, and other high-tech products? For certain, spending has stabilized after a multiyear decline triggered by the end of the dot-com spending spree. The trouble is that investors have been so eager for a return to the go-go days that they have once again bid up many of the leading companies to unsustainable levels. (Note the trailing P/E of 30 for the Nasdaq 100 and its 0.04% dividend yield.) Indeed, all this exuberance is based on what surveys suggest will be a mere 4% to 5% increase in tech purchasing in 2004.

Richard Chu of S.G. Cowen is quietly recommending a different strategy. This soft-spoken 57-year-old researcher will never be mistaken for a Wall Street "ax." Chu, a repeat performer from last year's All-Star list, is self-deprecating and a bit of an egghead. Even close competitors do a double take when they hear his name. Yet when it comes to picking tech stocks, no one has a better track record. Of the nearly 400 tech analysts, Chu is one of only five who have made money for investors in each of the past three years--and he's been by far the top performer. Chu has averaged a 19% gain over that period against the Nasdaq's 5% average annual decline. With a 36% gain in 2003, Chu bested his median peer by a stunning 27 percentage points.

Chu is no tech bull. His concern is that personal computers, in particular, have been commoditized, and that absent a spectacular surge in spending, companies will have no power to increase prices. But one company Chu thinks deserves some attention from investors willing to take a flier is Sun Microsystems (SUNW, $4). It's risky because the company has been bleeding losses since the end of the dot-com boom. However, there are signs that it could be turning around. This year Sun, which makes servers that operate computer networks and websites, is expected to turn its first profit since 2000.

The main rationale Chu has for buying the stock now is the $6 billion in net cash Sun has in its coffers, including $2 billion from a legal settlement with Microsoft. That money should be enough to keep Sun solvent. And subtracting the cash hoard from its market cap suggests that investors are valuing the business at less than $2 per share. If the company can get any operating momentum at all, it could be a steal. Sun has announced plans to cut 3,500 jobs and realign sales to bring in more recurring revenues. The company has also said it is developing a simpler, more competitive pricing structure for its products. "The market is saying Sun will not survive," says Chu. "Can I guarantee they will? No. But they have tons of cash and a very unique product."

Insurance Colin Devine, Smith Barney Pick: Prudential (PRU, $44)

Remember the woody allen joke about attempting suicide by inhaling next to an insurance salesman? When Smith Barney's Colin Devine sniffs around insurance, he smells opportunity. That's the reason we pegged this two-time All-Star analyst to explain why he thinks insurance, of all things, is the future of investing.

Begin with a really big--and really familiar--number. More than 77 million baby-boomers are going to retire over the next two decades. For most, the issue in their minds is going to be whether they have enough money to last the rest of their lives. Indeed, if you retire today at age 65 and are in good health, there is a 50% chance that you or your spouse will survive to age 95. Given the outlook for single-digit market returns and lingering memories of the bear market, boomers are looking for some security. And Devine, 44, predicts that millions of retirees will move their money into variable annuities, particularly a new category of products that give investors guaranteed minimum income for 14 years and a promise of 100% of their investment back, plus whatever capital gains were accrued. That arrangement makes the vehicles much more palatable to retirees. Traditionally annuities were questionable for most investors, because they allowed the issuer to make money while shareholders lived on a trickle of income.

The hook, from Devine's perspective, is that a company has to be an insurance underwriter to offer annuities. That's going to mean a huge pool of profits for insurance companies. In the past year, for example, some $140 billion has been invested in these plans, up from less than $50 billion a decade ago. Hartford Financial has seen a 51% jump in variable annuity sales over the past year. Lincoln Financial doubled its annuity business. And perhaps the large insurer that is best positioned to take advantage of this trend, says Devine, is Prudential Financial (PRU, $44).

Devine also picked Pru last year and rode it to a 36% return over 12 months. He remains a believer because Pru has been beefing up its annuity business. Just over a year ago it purchased American Skandia, taking an instant leap from its position as the No. 20 annuity issuer into the top ten. Pru also recently closed a $2.1 billion acquisition of Cigna's retirement-services business that doubled its pension and 401(k) segments; that will boost Pru's already impressive return on equity. Pru is also an increasingly powerful global financial player. Its insurance operations in Japan, for example, now generate 30% of the company's profits. The market has yet to register that. Pru shares are trading at just 13 times estimated 2004 earnings, or roughly at book value.

Precious metals Michael Dudas, Bear Stearns Pick: Newmont Mining (NEM, $40)

Few investors would give much of their time to understanding precious-metals stocks. But those who followed the advice of Bear Stearns analyst Mike Dudas have turned $1,000 into $3,500 in just three years. How is that 53% annualized return possible? Just look at the price of gold, up from $252 an ounce in 2001 to $388 in mid-May. The rally has been broad, not just in gold but also in silver, coal, and most other natural resources. The run-up has occurred as a result of rising global demand, which has given mining companies the power to raise prices for the first time since the 1980s.

There is also a global shortage of key metals. That's because capital spending on mining and exploration hit a low during the tech boom. In 1996, for example, worldwide spending on gold exploration annually was $3 billion. It has since fallen below $1 billion. Since it takes between four and eight years to bring refined gold to market from the time a mine opens, there's good reason to believe the shortage will not disappear anytime soon.

Despite gold's strength during the bear market, Dudas, 40, predicts that global inflation will fuel a continued rally in metals even as the economy continues to improve. That's because inflation erodes the value of currencies, while precious metals retain their underlying value. The scenario bodes well for companies such as Newmont Mining (NEM, $40), the largest precious-metals company in the world. The company is a mining powerhouse, with operations on six continents. It is an aggressive explorer as well and has plans to invest some of its $1.5 billion in cash to develop ventures in Ghana and Australia. An added attraction is that in April, Newmont increased its annual dividend payout from 20 cents a share to 30 cents. But what's most appealing about Newmont is what it is already pulling out of the ground. Newmont has said it plans to produce more than seven million ounces of gold this year, at an average cost of $230 an ounce. It would then presumably sell that gold for a much higher wholesale price. Retail prices, predicts Dudas, will go up from an average of about $363 an ounce in 2003. Based on Dudas's estimate that gold will average $415 this year, Newmont's profits should rise at least 33%.

Autos Stephen Girsky, Morgan Stanley Pick: Lear (LEA, $58)

Automakers have really been on a roll. Only recently Ford announced a record $2 billion quarterly profit. The problem is that the car companies' increased earnings have been driven by the cheap financing available to customers. Rising rates will stall sales of cars and trucks. Adding to the gloomy outlook, high gas prices are convincing some consumers that they should stay away from the inefficient SUVs that have padded profit margins for the past few years.

Those are all signs that suggest investors should tread carefully among the automakers. That's certainly the message Stephen Girsky is sending. The Morgan Stanley veteran is the dean of auto analysts. He leads a team of 15 analysts and associates in the U.S., Europe, and Asia. Collectively, they report on 80 auto stocks. Their research also gives Girsky, 42, a unique global perspective that has helped him become the sector's most consistent stock picker. His choices returned 15% in 2003, and he has averaged a 23% annualized return over the past three years.

Right now Girsky is suggesting that investors look inside the car for moneymaking opportunities. In the quest to appeal to increasingly finicky consumers--and the hypercompetitive environment in the U.S. and Europe is compounded by overproduction--automakers are increasingly trying to impress car buyers with swanky interior features. Consumers, in turn, are demanding more electronic gadgets and various creature comforts such as heated seats and wood trim. Automakers feel they have no choice but to respond. A recent study by the forecasting firm CSM Worldwide predicts that in North America alone, annual spending on vehicle interiors will grow from $7.5 billion this year to $10 billion by 2009.

All that underscores the argument for Girsky's favorite stock right now: Lear (LEA, $58). Lear (which is not related to the private-jet maker) makes dozens of components that go inside passenger compartments. Its seats, door panels, and other interior components are used by most major automakers, including General Motors, Toyota, and BMW. The company, dubbed by Barron's the "king of the cabin" and ranked as one of FORTUNE's Most Admired Companies, is expected to increase revenues at a 7% long-term pace and profits in the range of 10% to 12%. Lear is valued at just nine times 2004 estimated earnings, and Girsky considers it a serious bargain.

Health care Thomas Carroll, Legg Mason Pick: Anthem (ATH, $88)

Managed care is one of those businesses that always seem to make money. After all, everyone needs to go to the doctor. Even in a hotly contested political season, when talk of rising health-care costs has become a core component of campaign rhetoric, companies are expected to grow profits in the range of 20% this year. That hasn't stopped naysayers from warning of a selloff in HMO stocks.

But Legg Mason's Thomas Carroll can be trusted to offer a careful diagnosis. Carroll, 34, is a former health-care consultant with KPMG. As a stock picker, he's unsurpassed in the health-care sector. In 2003 he gained 48%, vs. 12% for the median sector analyst. That followed a 41% return in 2002.

Carroll says the big issue for companies will be how effectively they control costs. Managed-care companies grow profits by capturing the spread between rising coverage prices paid by employers and employees and the underlying cost of medical treatment. If coverage costs rise 12% this year--as they are expected to--but treatment costs are up only 9%, the company pockets the difference. But that kind of growth goes only so far. And so Carroll is looking for companies that can do well even if the growth of health-care premiums slows.

That points him to Anthem (ATH, $88), part of the Blue Cross/Blue Shield network. The California-based company is merging with Wellpoint to form the largest managed-care company in the country, with 26 million participants and annual revenues of $36 billion. Like Anthem, Wellpoint came out of the Blue Cross system, which could make for a smoother merger transition since both share a common heritage of cost cutting. Where Carroll sees an investment opportunity is in investors' skepticism about the merger--Anthem's stock has fallen 10% over the past two months--and Anthem's track record of growing profits by introducing new products and growing enrollment, not just relying on increases in health-care payments. The forecast is for earnings to grow 26% this year on top of 28% growth in 2003. Once the merger is complete, Carroll estimates total savings of more than $250 million per year, cash flow in excess of $2 billion, and higher profit margins. He also expects the emboldened Anthem to make an even bigger stamp on the national level and become the top health-coverage provider for large employers.

Biotechnology Jason Kantor, W.R. Hambrecht Pick: Seattle Genetics (SGEN, $7)

The potential of biotech is as tantalizing as it is dangerous. For every home run on the scale of OSI Pharmaceuticals (shares of the company recently jumped from $38 to $98 in a single day after its cancer drug Tarceva scored FDA approval), there is a Genta-sized disaster (the company saw its stock drop 75% in early May after it withdrew its application for FDA approval of an experimental cancer drug).

Further confusing the issue is that biotech analysts have been as bad at picking stocks as any of their peers. An exception during the past two years is Jason Kantor, 35, an analyst with W.R. Hambrecht & Co. Kantor's recommendations gained 31% in 2002 and 77% in 2003. He scored by telling investors to focus on newer biotechs with promising drugs in the pipeline. His argument is that because Wall Street tends to spend less time researching smaller companies, the opportunity exists for a bigger payoff.

Kantor's favorite prospect right now is Seattle Genetics (SGEN, $7). The tiny biotech specializes in the field of antibody conjugation (a fancy way of saying that it is developing techniques to turn antibodies into "missiles" that go after cancer tumors). The company hasn't yet made it to the market with a drug, but three promising clinical trials are underway. Its drug to treat lymphoma is now in Phase II trials. Though it's losing money, the company has $132 million in cash socked away. What's more, it has forged partnerships with industry leaders Genentech and Celltech. Those deals have provided a growing revenue stream since early 2001. Investors should be warned: Seattle Genetics is a high risk. That said, if any of its drugs make it to the market, investors will be huge beneficiaries. Unlike many other biotechs, this company has retained the rights to its products and will reap the rewards if it is able to pass all the regulatory screens.

Housing Paul Puryear, Raymond James Pick: Toll Brothers (TOL, $41)

Will the housing bubble burst? this is such a frequently asked question that it has become a cliche. But we think it's worth asking again. With the bond market betting that the Federal Reserve could start hiking short-term interest rates in just a few weeks, the major catalyst behind the housing boom could be near an end. No question, record home sales and a 7% annualized increase in home values have been fueled by record-low mortgage rates. More than 38 million Americans have refinanced their home mortgages, and more than 22 million homes have been sold since 2001. In the past few months, though, those markets have begun to slow down. Indeed, in late May the Commerce Department announced that sales of new homes fell 11.8% in April.

Paul Puryear sees rockier times ahead. Puryear, 55, used to be the CFO for the fast-food unit of building-materials company W.R. Grace. He also helped run a commercial real estate development company in Atlanta. He's been following real estate--related companies for Raymond James for the past decade. In 2001 he became one of the most vocal bulls on the sector. He stayed that way for three years, helping investors make 47% annually on his recommendations during that stretch. It's noteworthy, therefore, that in mid-May he lowered the rating on most of the stocks he covers from buy to hold. He says he isn't ready to tell people to sell, but he is also less excited than ever about the future. "Interest rates have been dropping for 20 years," Puryear says. "Unfortunately, we think they are now headed up."

Historically, that has meant trouble for housing stocks. In such a climate, investors need to be picky. Puryear suggests sticking to the companies that are best positioned to weather rising mortgage rates. Toll Brothers (TOL, $41), for example, sells primarily to higher-end homeowners, who are less sensitive to rate changes. It managed to grow revenues during the last three periods when mortgage rates spiked--1995, 1998, and 2000. And despite a 37% jump in profits for its most recent fiscal quarter, Toll Brothers shares trade at a modest P/E of ten. Perhaps best of all, the company has a record backlog of 6,225 homes to build in two dozen states, worth about $3.7 billion. That gives it a solid foundation for future growth.