Look to January for stock market's trends

Just as January tends to be a barometer for the stock market's direction for the whole year, sectors that outperform in January tend to keep outperforming, too. Since 1970, January's 10 best performing industries within the S&P 500's 114 sub-industries outperformed the S&P during the remaining 11 months 73 percent of the time, says S&P's Sam Stovall. "Those industries produced 15.7 percent average annual gains for those 11 months, more than doubling the S&P 500's 7.1 percent gain."

Torray Fund focuses on stocks that seem undervalued based on their cash flow, financial leverage, growth prospects, competitive position and historical profitability. It particularly likes companies that have performed well in adversity and operate in sectors with high barriers to entry. It tends to hold on to such stocks indefinitely, meaning that its 13.6 percent average annual gain over the past decade has been highly tax-advantaged. Recent favorites: Abbott Laboratories, Amgen, Illinois Tool Works, J.P. Morgan Chase, Markel.

Vanguard Health Care Fund has been the top performing health fund over the past 15 years. Its 19 percent average annual gain over that period beat its average competitor by 4 percentage points. Vanguard's manager, Edward Owens, now thinks that biotech issues have the best prospects of any sector in health. His favorites: Amgen, Cephalon, Genzyme, Gilead Sciences, Idec, Vertex Pharmaceuticals.

Benjamin Graham, the dean of value investing, liked to invest in companies selling for less than the value of their current assets (cash, receivables and inventory) minus debt. Few companies meet his strict criteria today. So Money magazine modified the formula to include companies trading for less than tangible assets (mainly cash, receivables, inventory, plant and equipment) minus debt. It uncovered three that it believes have good growth prospects: Circuit City, El Paso, UnumProvident.

As a rule, individual municipal bonds should be purchased only if you don't plan to resell them, cautions Annette Thau, author of "The Bond Book" (McGraw-Hill, $30). "Otherwise, commission costs (which apply both when you buy and when you sell) seriously reduce overall returns. Remember also that commission costs are particularly high when you need to sell."

One way to capitalize on the dollar's continuing weakness is to find an investment that moves in the opposite direction. Gold fits that description. Merrill Lynch research shows that over the past 10 years, gold has had a correlation of minus 0.84 to the dollar -- not quite perfect, but close. While the dollar dropped 23 percent vs. the euro for the two years through last September, gold climbed roughly 30 percent, and gold mutual funds on average exploded for gains of just over 100 percent.

Site of the Week: Check out www.quicken.com, a free site whose One- Click Scorecard allows you to see whether a given stock passes screens based on experts' strategies devised by such investment gurus as Warren Buffett and Geraldine Weiss. Also available are insider- activity data, valuations, growth rates, financial ratios, historical comparisons and analyst recommendations.

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.

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