Get ready for the post-bear bounce; boost your portfolio's returns by finding sectors poised for a market rally. (Investing).

RODNEY M. BAGLEY IS ALWAYS ON THE LOOKOUT FOR his next investment opportunity. The 41-year-old executive vice president of finance and chief financial officer for The Neptune Society, a Burbank, California-based company that specializes in cremations, has been busy adjusting his portfolio and targeting stocks that will rebound with the economy.

In fact, he began restructuring his holdings in the fourth quarter of 2000. Once a day trading daredevil, he stopped that practice, dumping such tech highfliers as JDS Uniphase (Nasdaq: JDSU), Broadcom (Nasdaq: BRCM), and Ariba (Nasdaq: ARBA). Bagley has since replaced those equities with blue chips like International Business Machines (NYSE: IBM), American Express (NYSE: AXP), and General Electric (NYSE: GE).

"I made a move from companies that had great projections to companies that had great performance," he asserts. "The irrational exuberance that Alan Greenspan talked about wasn't going to last forever. There was going to come a point where people were going to say that your story is great but, at the end of the day, you're going to have to produce available free cash flow if you want your stock to be worth anything."

When the Sept. 11 tragedy brought the financial markets to their lowest point in several years, Bagley didn't have to touch his portfolio. In fact, from Dec. 1, 2000 to March 1, 2002, the stocks Bagley dumped have each taken a freefall. JDS Uniphase, Broadcom and Ariba, plummeted 91.14%, 66.53% and 92.24%, respectively, but the stocks he replaced them with did much better. IBM gained 8.51%, while Amex and GE lost 30.71% and 21.10%, respectively.

"The event of 9-11 was no different, economically speaking, than the Asian flu [of 1998] or the economic crisis in South America," he says. "They were temporary events that the market reacted to and then caught its footing and hit an equilibrium. That's where we are now; we're right back to where we were prior to 9-11."

We don't have to tell you that the last two years have been tough on investors. It was only the third time in history that the Dow Jones industrial average and the Nasdaq composite index experienced two consecutive years of losses. The bear market responsible for those losses started in March 2000, mauling investor's portfolios for more than a year and a half before the indices ebbed to their lowest points in two years on Sept. 21, 2001.

Most bear markets--a 20% drop from a market high--signal that the economy is off-kilter. The market could, however, be dragged down by an unexpected trend or turn of events like a spate of negative earnings reports or, more recently, the Enron scandal. But investors--especially African Americans, who, according to a recent study, tend to have a low tolerance for market volatility--shouldn't panic and pull out of the market. Why? You may miss out on the next big rally.

We're not blowing smoke. Just look at the historic performance of the Dow. According to a report by Ernie Ankrim, director of portfolio research at the investment firm Frank Russell Co., the U.S. market "behaves much like a rubber band, with a tendency to bounce back." The 119-year-old Dow has endured 19 bear markets with an average decline of 37%. In the years following these troughs, Ankrim maintains, the Dow has produced an average annual return of 40%.

So what does this mean? Market declines can often offer the best opportunity to buy great companies at bargain prices. You just have to know where to look.

INCREASING YOUR ODDS OF SUCCESS

Rebounding from a bear market isn't easy, but it's possible if you can anticipate which industries are most likely to benefit from a recovery. To increase your odds of choosing stocks that will vigorously bounce back after market routs, BLACK ENTERPRISE asked Lipper Inc., a global provider of mutual fund information and analysis, to evaluate sectors that performed best after bear markets began (see chart). By identifying areas that have better staying power during market lows, these sectors can offer valuable clues on how to minimize losses and reposition your holdings to maximize gains.

Lipper tracked six sectors--healthcare, real estate, utilities, technology, natural resources, and financial services--and charted their average percentage growth at six months, 12 months, and 36 months after the start of the last four bear markets (including the one that began in March 2000).

Research analyst Jeff Tjornehoj defined growth in each sector as "the post-bear bounce," a measure that indicates which sectors stand to make a quick recovery. Although each bear market is different and no market theory is absolute, he asserts, "The longer [period of] time invested, the better off each sector performed."

Indeed, each sector Lipper analyzed showed an average increase of at least 17.5%, 36 months after the start of a bear market (the March 2000 bear market was excluded from this average). Therefore, long-term investors have the best shot at their portfolios producing substantial gains.

The sector with the best track record: healthcare. "Healthcare and biotech are going to do better because there are more people who are older and require drugs," explains Tjornehoj. "When you add the increase in advertising, which has helped consumers become more aggressive about asking for medications, they become safe, defensive positions." The healthcare sector averaged 7.37% at six months, 7.9% at 12 months, and 46.95% at 36 months after the last four bear markets. Picking from our list of "22 Stocks for 2002" (see January 2002), Merck & Co. (NYSE: MRK) could benefit from the coming recovery because of its current pipeline of popular treatments, such as the arthritis drug Vioxx and the cholesterol-blocker Zocor.

SECTORS TO BRIGHTEN UP YOUR PORTFOLIO

The next bright spots were real estate and utilities. Although these sectors averaged minimal gains six months after a bear market began, they produced returns of 7.95% and 6.72%, respectively, after 12 months. And, after a 36-month period, they really gave investors' portfolios a boost: Real estate was up 31.88%, while utilities surged 36.12%. "Real estate is a good bet because people like the comfort of hard assets in a downturn," says Tjornehoj. "When the rest of their wealth seems to be melting away, people do favor something they can put their hands on." As for utilities, these equities offer investors a solid defensive play since consumers use energy in good times and bad--and they provide some of the best dividend yields. Our list of 22 stocks also shows that Vornado Realty Trust (NYSE: VNO) should be a real estate pick that will flourish in the current low interest rate environment. Dynegy (NYSE: DYN), from the utility sector, should capitalize on the increasing demand for electricity and natural gas.

It took longer for the other three sectors to produce solid gains. Take financial services. It averaged an anemic -2.90% return after six months, but then posted gains of 5.98% after 12 months, and 38.13% after 36 months. Tjornehoj says the financial services area is slower to recover because of its sensitivity to interest rates and credit quality.

Natural resources and technology showed negative returns at both the six- and 12-month marks. But those who stuck to their guns witnessed respectable performances. After 36 months, technology and natural resources were up 28.03% and 17.58%, respectively. The natural resources sector, which includes forestry, paper products, and energy companies, is heavily influenced by energy prices, which shot up like a geyser last year before sliding. As for tech, it hasn't followed any fundamental patterns since the rally of the '90s. Investors may want to look at financial services companies such as Alliance Capital Management (NYSE: AC), which is benefiting from low interest rates and a 6% dividend that is attracting investors. Or, consider a firm such as Boeing Co. (NYSE: BA), which yields exposure to the technology sector with the strength of the government's focus on the defense industry.

REPOSITION YOUR ASSETS

So what's your next step? If you're sitting on the sidelines, get back into the market. "I'd say it's probably not a bad time to start moving out of the defensive areas," says Tjornehoj, "because once we start to get even a sniff of a positive catalyst, as far as corporate earnings go, we're going to see people start getting back into the market more broadly than they've been over the last year and a half."

Rather than relying solely on statistics from past bear markets, Iva Funderburg, senior equity research analyst at Detroit-based Alpha Capital Management, says reposition your portfolio in line with industry trends to take advantage of the coming rally. Like most analysts, she believes the economy has begun to stabilize. "I think we have at least one more [bad] quarter, then I think we [will] start to rebound a bit," she says. "When people have cash and are more confident about the economy, they take that cash and buy [nonessential] items such as cosmetics, general merchandise, clothing, and footwear. That's where you may see the growth."

To bear out her assertion, Funderburg examined how several sectors performed against the Standard & Poor's 500 index after the 1990-1991 bear market. She found that the S&P 500 was up about 19% from 1991 - 1992. During that same period, the performance of stocks in the footwear industry was up 51%; apparel, 36%; retail apparel, 70%; and personal products, 23%. Some stocks Funderburg covets include Ann Taylor (NYSE: ANN) in the apparel industry, the Costco (Nasdaq: COST) retail chain, and Avon (NYSE: AVP) in the personal products area. "In an economic downturn, you cut out the frills," Funderburg says. "When [the economy comes] back, you purchase the frills."

In addition to Lipper's top rebound sector--healthcare--Funderburg believes investors should focus on insurance companies. Because of 9-11, the industry will prosper, she says, since business insurance and reinsurance will realize "a run-up in prices." In these two areas, Funderburg favors Becton, Dickinson and Co. (NYSE: BDX), a medical equipment manufacturer, and insurer AON Corp. (NYSE: AOC), as firms that will benefit from trends in their industries.

Bagley, who seeks to retire at 50, seems as if he will heed the experts' advice. He unequivocally plans to stay in the market for the long haul. "Historically speaking, the market over time has been the best-performing investment vehicle in the world," he says. "Looking at my age and time horizon for retirement, there is no reason why I can't stay in the market and ride out the bumps." By identifying the right sectors, Bagley and others can create a smooth path to reach their financial goals.

Selected Sector 6-Month, 12-Month
and 36-Month Performance
After Bear Markets (1987-Present)

6 Months                Total       Total      Total      Total
                       Return       Return     Return    Return
                       8/31/87     6/30/90    6/30/98    3/31/00
Sector                 2/28/88     12/31/90   12/31/98   9/30/00

Financial Services     -14.64       -13.04      -5.39     21.49
Healthcare             -19.71         4.94      12.56     31.67
National Resources     -23.46        -5.55     -19.80     11.86
Real Estate             -2.58        -3.49      11.52     20.20
Technology             -22.65       -14.84      27.22    -11.78
Utilities               -5.26         1.46      10.88      9.96

12 Months
                       8/31/87     6/30/90    6/30/98    3/31/00
Sector                 8/31/88     6/30/91    6/30/99    3/31/01

Financial Services      -9.71        11.69      -0.81     22.74
Healthcare             -21.00        33.32      10.62      8.67
National Resources     -20.93        -4.68       2.45     10.94
Real Estate             -3.01        13.46      -6.56     27.90
Technology             -21.78         3.18      33.75    -23.81
Utilities               -3.49         7.07      20.43      2.86

36 Months
                       8/31/87     6/30/90    6/30/98    3/31/00
Sector                 8/31/90     6/30/93    6/30/01    3/31/03

Financial Services      -5.15       103.93      15.61      N/A
Healthcare              29.74        47.65      63.47      N/A
National Resources      12.20        14.57      25.97      N/A
Real Estate              3.49        68.42      23.72      N/A
Technology              -9.95        55.59      38.46      N/A
Utilities               19.79        57.30      31.26      N/A

6 Months
                     Avg. 6 Mo.
                      Post-Bear
Sector                 Bounce

Financial Services      -2.90
Healthcare               7.37
National Resources      -9.24
Real Estate              0.65
Technology              -5.51
Utilities                4.26

12 Months            Avg. 12 Mo.
                      Post-Bear
Sector                 Bounce

Financial Services       5.98
Healthcare               7.90
National Resources      -3.06
Real Estate              7.95
Technology              -2.17
Utilities                6.72

36 Months            Avg. 36 Mo.
                      Post-Bear
Sector                 Bounce

Financial Services      38.13
Healthcare              46.95
National Resources      17.58
Real Estate             31.88
Technology              28.03
Utilities               36.12

SOURCE: LIPPER