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Mutual Funds

Stock Picking as Chess

It's about anticipating moves later on.

&#ltp&#gtInvesting in solid companies with short-term woes is a lot like playing chess, says &#ltb&#gtMichael Carmen&#lt/b&#gt, manager of Hartford Growth Opportunities (HGOAX 888-843-7824 5.50% sales charge for the A shares). "It's all about figuring out what will be working later in the game," he says. Carmen seeks stocks that are trading for at least 30% below what he thinks they're worth. Over the past three years to January 3, the fund returned an annualized 24%. Among Carmen's favorite stocks: &#lt/p&#gt&#ltp&#gt&#ltb&#gtAbercrombie & Fitch&#lt/b&#gt (ANF). At the start of the 20th century, Abercrombie sold rugged apparel to wealthy outdoorsmen. The New Albany, Ohio, company is still a "sportswear machine," says Carmen, except now it outfits the young and hip. After several years of bland performance, the teen-focused retailer returned to its high-end roots and stopped deeply discounting apparel. Sales rose almost 40%, to $1.8 billion, in the first nine months of the fiscal year ended January 2006. Recently $64, the stock trades at 15 times the $4.33 per share that analysts expect Abercrombie to earn for the year ending January 2007, according to Thomson First Call. &#lt/p&#gt &#ltp&#gt&#ltb&#gtCephalon&#lt/b&#gt (CEPH). This West Chester, Pa., biotech company, which develops and markets drugs to treat neurological disorders, chronic pain and various forms of cancer, has a slew of new products in the works. This year, it plans to roll out four new drugs, including Vivitrol, for treating alcohol dependence (Cephalon will market the drug, which was developed by Alkermes). Cephalon expects revenues to reach as high as $1.4 billion this year, double the $715 million registered in 2003. The stock, at $73, sells for 23 times estimated 2006 earnings of $3.13 per share.&#lt/p&#gt &#ltp&#gt&#ltb&#gtSchering-Plough&#lt/b&#gt (SGP). A four-year earnings slump that followed the loss of patent protection for Claritin is over. The Madison, N.J., drug company's products include cholesterol-lowering drugs Zetia and Vytorin, which helped drive up earnings last year. Carmen says he's particularly enthusiastic about Fred Hassan, who revived Pharmacia & Upjohn in the 1990s and who became chief executive of Schering in 2003. At $20, the stock trades at 35 times estimated 2006 profits of 58 cents per share.&#lt/p&#gt &#ltp&#gt&#ltb&#gtStarwood Hotels & Resorts Worldwide &#lt/b&#gt(HOT). Its moniker may not be as recognizable as its stable of upscale properties: Le Meridien, St. Regis, Sheraton, Westin and the trendy W. The White Plains, N.Y., company owns, operates and franchises more than 850 properties in nearly 100 countries. In November, it struck a deal to sell 38 hotels to Host Marriott for $4 billion, although it will continue to manage the properties. "Starwood is becoming more of a management company, which means less volatility in its earnings stream," Carmen says. The company is also cashing in on a growing segment of the travel market by selling time-share properties in resort areas. The stock, at $64, sells for 26 times estimated '06 earnings of $2.42 per share. &#lt/p&#gt