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Some thoughts on equities, bargains and utilities

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Carlos Asilis, JP Morgan's U.S. equity strategist, is pessimistic about stocks for three reasons. First, he believes that equities remain expensive "given current earnings and growth prospects over the next few years." He also thinks corporate earnings will disappoint expectations, because companies are having trouble raising prices. Finally, he believes that factors that enhanced cost-cutting, such as high productivity growth, may not recur to the same degree going forward.

Gabelli Value Fund, one of the earliest proponents of bargain-basement stock-picking, has appreciated an average 13.7 percent annually over the past five years by focusing on stocks with high free-cash flow and moderate price-earnings ratios. It also looks for a catalyst that could boost the share's prices, such as corporate restructuring. Recent favorites: Viacom, Media General, Cablevision Systems, Liberty, Navistar International, American Express.

Utility stocks should benefit significantly from the new favorable tax treatment of stock dividends. To find the best prospects, Smart Money magazine (1755 Broadway, New York, NY 10019) recently screened utilities with dividend-payout rates of 80 percent or less, debt ratios of 70 percent or less and market values of more than $1 billion. It then eliminated those with high debt growth, low cash flow, low yields and low interest coverage. The survivors: NiSource, Nstar, Southern Company, Dominion Resources, First-Energy, DTE Energy, Scana, FPL Group.

Many fund managers say they won't invest in a company without meeting its top executives. Lanny Thorndike of Century Small Cap Select Fund goes a step further. He visits the middle managers who help implement the CEO's vision. Beyond that, Thorndike seeks companies that derive at least 60 percent of sales from repeat customers and generate earnings gains of 20 percent annually. Four recent picks: Henry Schein, Hub International, Rogers Corp., Stericycle.

Junk bonds rated B or BB and yielding 8 percent to 9 percent are the fixed-income arena's best values now, says Joan Payden of Payden & Rygel in Los Angeles. Investors are more than compensated for their risk if they stick to the higher-quality issues, she says. Many such bonds were issued by small but solid companies that had no choice but to turn to the high-yield market because bank financing has been so hard to come by in this tough business environment.

While large-cap and mid-cap index funds have kept pace with their actively managed peers, the same isn't true for small-cap and international stock funds. A recent study by professor Rich Fortin of New Mexico State University and Stuart Michelson of Stetson University found that actively managed small-cap funds outperformed the Russell 2000 index by 4.5 percentage points annually between 1976 and 2000, while actively managed international index funds beat Morgan Stanley's EAFE index by 0.6 points annually over the past decade.

Site of the Week: Go to www.fedstats.gov for a free site that provides links to statistics from more than 100 federal agencies. Information most useful for investors includes data on economic and population trends, health-care costs, foreign trade and farm production.

Investor's Notebook is a digest of investment opinion from the world's leading financial advisers. It does not recommend any specific investments, and no endorsement is implied or should be inferred. For more information, contact the individual firms cited.