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Bombs Away!

So what if tech tanked? Before it bounces back, there's money to be made in less glamorous sectors, like tobacco and defense. (What, you got a problem with that?)

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People hate the stock market right now. They despise it because of their newfound losses. And they can't believe that their favorite stocks, many of which have been cut in half, can go still lower. They wish they had sold everything on March 10, the nasdaq's top, and find it hard to even look at the stock tables or their monthly statements. But is it the stock market that they really hate, or is it technology, that portion of the stock market that has come to define investing for us in the past five years? Do they really abhor a portfolio of balanced stocks, or do they consider the stock market to be Cisco, Intel, Microsoft, and a couple more wild tech names that made people fortunes during the great Bull Run?

I'm no Pollyanna. But I was born to search for bull markets wherever I can. And I am happy to report that there are a few bull markets that are alive and well right now, not gushers but decent money-makers, even if the nasdaq continues to falter.

Don't bother looking in any of the old familiar haunts: semiconductors, software, contract manufacturing, computers, wireless, and, I am afraid to say, even fiber optics, which is the last region in what was once a boiling tech market. These well-trodden areas are in what stock-market folk call "distribution," meaning they are struggling to find real owners, not the margined transients who took so much of this stuff down at much higher levels. I am reluctant to call tech a bear market because that rubric comes with too much baggage. The "fundamentals," the actual core businesses of tech, are doing fantastically. In fact, the biggest negative is the lack of supply -- there aren't enough components to make all of the tech equipment needed to meet worldwide demand. The stocks simply got well ahead of the prospects; they were too richly valued for management to meet the expectations set for them by worshipful buyers. When these stocks come down enough, they will reignite and become excellent buys. But they aren't there yet.

While these stocks cool, however, mini-bull markets abound. You just need to know where to look for them. They don't offer the rewards of technology investing, meaning that there isn't one of these groups that could double or triple in a three-month span, something that became commonplace for hot tech areas before the market topped. But they offer something that has become a bit like gold in the mountains of dirt and rock -- they offer real gains.

So here's your guide to the five paths that are making people money in the toughest market anybody has seen in six years -- that's six years since the last time the Federal Reserve started aggressively tightening up on interest rates as a way to cool an economy it thought was getting way too hot. Back then, in 1994, this stuff worked best right when the gloom set in, just as people began to realize that the economy was indeed slowing and that plenty of companies that needed a strong economy would not live up to expectations.

That's where we are right now in 2000, so why not go with what worked in the past? That's what we're doing at Cramer Berkowitz, and we have a ton of money on the line. This isn't just idle cocktail-party chatter about how crummy the market has become; this is how we're working the market.

Food stocks: Talk about bear markets. This group has been in one since Pillsbury got a bid in the late eighties. Once the province of bountiful yearly gains during the period when the Japanese conquered all but our dining table (yes, there was a time when I sold the food stocks at Goldman Sachs with the tag line "You will never see a bottle of Mitsubishi Ketchup on your table in our lifetime, so why not buy Heinz?"), this group is back, filled with takeovers and stable growth prospects. We have come to like General Mills and Sara Lee and have even debated buying Kellogg, a company we shorted successfully for a decade. Best Foods, one of the choicest of the lot, is being pursued by Unilever. Best Foods' attempts to roust a white knight could pay off with suitors for the remaining players in the industry. Not a lot of risk, some decent reward.

Defense stocks: Holy cow, this group has been clobbered. Once loved for its consistent earnings, under Clinton this group became the whipping boy of almost every branch of the government. Things have gotten so negative for these companies that the military now frets that some of them aren't strong enough to survive. But as the Federal Reserve keeps tightening, expect to see more people join the Republican fold. A Bush win should make this group double in price. Lockheed, Northrop Grumman, Raytheon, and General Dynamics will all benefit.

Tobacco: Ouch, I hate writing positive things about these guys. But the ethical dilemma of making money off these stocks has been resolved by my clients, who demand performance and don't demand asterisks about which stocks I make them money with. Right now I'm making it with tobacco, and the best performer is Philip Morris, a company that seems to be morphing into Kraft as I write. Kraft is worth more than the price of the stock, and if you can stomach the litigation, you have a chance for a 30 percent move in a relatively short time.

Hospitals and managed care: Another group that has been in bear mode while technology romped. As the economy slows, the earnings of these recession-proof stocks should shine brightly. Two of my favorites, which I am waiting for a pullback to buy, are United American Healthcare and HCA, the old Columbia Healthcare. The latter just settled a huge fine and is putting its sins behind it.

Beverages: Everything from Pepsi to Bud's been rocking ever since the market peaked three months ago. Normally, I would say these stocks have had too much of a run, but considering that they have done virtually nothing for years and years, they may have some further upside in them yet, especially if the Fed decides to inflict more pain on us in the form of another round of interest-rate hikes.

I know there isn't an "interesting" stock among them. I know that no one talks about these stocks at parties, no one brags about these holdings during commercials between Knicks games. But we are entering a phase where talking about the market is like talking about a death in the family. You do it circumspectly, as you never know who just incurred ruinous losses. Maybe a boring portfolio is just what is needed to get you through this era of newly lowered stock expectations.

And what do you do with all of that technology that you loaded up on during the great bull run in these stocks? Frankly, it is too late to sell most of the decimated stuff. Seems like dead money to us until we are farther along in the slowdown. If the pattern of seven years ago holds, three months from now we will want to jump back into tech. It is the opportunity cost of waiting while these other stocks work that we find unforgivable. We would rather make money in what's working -- I didn't earn the nickname "the Reverend of the Church of What's Happening Now" for nothing -- than stare at stocks that seem to go up three and down three with Ferris-wheel-like regularity, ending exactly where they started when the ride began.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had positions in Best Foods, Cisco Systems, General Mills, Intel, Microsoft, Pepsi, Philip Morris, and Sara Lee. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites comments at jjcletters@thestreet.com .

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