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VOLATILITY? NO BIG DEALSCHWARTZ, NELSON D1503 wordsApr 2 2007Fortune113English 2007 Time Incorporated. Provided by ProQuest Information and Learning. AllRights Reserved.The recent 400-point plunge is no reason to panic. But it is a good excuse totweak your portfolio for tougher times.For ordinary investors, the market's recent heart-stopping plunge and onlymodestly reassuring rebound seemed to come out of nowhere. Sure, there wereexplanations--a selloff in Shanghai, rising defaults in risky mortgage debt, arecession warning from former Fed chairman Alan Greenspan--but as Citigroupstrategist Tobias Levkovich says, the speed of the decline "made people feelunglued."Maybe so, but for the institutional types whose portfolios are measured in thebillions, the drop simply wasn't that scary. "I wouldn't say the world has changedmuch," says Ben Inker, director of asset allocation for Boston-based money-management firm GMO. Adds Westwood Holdings chief investment officer Susan Byrne:"Everybody's been through crises much worse, and we've been waiting for this fortwo years,"Individual investors would do well to strive for such sang-froid. Maybe a fewnumbers will help put things in perspective. While the 416-point decline on Feb.27--the seventh-biggest ever--wiped out about $600 billion in market value, inpercentage terms the decline was only 3.3%, not big enough to make the top 20.Even after the carnage, the Dow was less than 5% below its all-time closing highof 12,787 (set on Feb. 20). And by March 9, the Dow was back at 12,276.Of course, seasoned managers like Byrne and Inker can afford to be blas. Becausewhat pros like them have been doing over the past month is to weatherproof theirportfolios--laying off the riskiest bets, taking profits in the markets that haverun up the most, and stepping back from the groups that will be the most exposedif Greenspan's worries about a recession prove prescient.Now, says Inker, individual investors should think about doing the same. Thatdoesn't mean a wholesale revamping of your portfolio. Instead, it's aboutselecting stocks and sectors that are likely to hold up best if the market doesdecline further--or that will keep pace if it rebounds. Just as important isidentifying areas priced for perfection--expensive names that will fall thehardest if a deeper correction comes.Inker likes big blue chips with steady growth prospects and not much debt--nameslike Wal-Mart (WMT, $47), AT&T (T, $37), Coca-Cola (KO, $48), and Microsoft (MSFT,$27). "You may not get rich off them, but you have a decent chance of staying richwith them," he says. "And that's not true of other sectors. These companies don'treally need to borrow, so they're less sensitive if credit spreads widen."Jim Margard, co-manager of $12 billion Seattle-based Rainier InvestmentManagement, is also sweet on Coke. "It hasn't done much in recent years, but it's

predictable, it's diversified, and as a megacap, it's less volatile." What's more,Coke has a 3% dividend yield, the same payout as more risky REITs (more on theirdangers later). Margard favors other blue chips like GE (GE, $34) as well ascheaper, non-U.S. oil giants like Shell (RDS-B, $65) and France's Total (TOT,$66). All three, which are megacaps like Coke, also boast dividends of well over3%. Byrne, another GE fan, adds that once GE completes the sale of its hugeplastics division now on the block (it's expected to fetch at least $10 billion),"they will do something shareholder-friendly with that money"--like a dividendhike, a share buyback, or both.Another argument for megacaps is that they are much cheaper than their smallerbrethren. The top 100 U.S. stocks by market capitalization are trading at a

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reasonable 14 times operating earnings, Inker notes. Companies that rank in sizefrom 501 to 1,000 trade at a steeper 21 times operating earnings, while the onesranked from 1,001 to 3,000 go for a whopping multiple of 28. "That's quite high byhistorical standards," says Inker. "Normally you get bribed to own small caps inthe form of lower P/Es, but these stocks have been on a tear." So if earningsgrowth does slow, there's not much room for the inevitable earningsdisappointments among small caps.What else should prudent investors avoid? Margard is steering clear of REITs, orreal estate investment trusts, which have boomed with the commercial-propertymarket and also fetched huge buyouts from private-equity players like Blackstone."Valuations are at a lofty level," he says. "I just think if we see vacancies goup or any other problems, these stocks will correct sharply." Although Inker likesthe megacaps, he is cautious about big financials like Citigroup, J.P. Morgan, andBank of America. "It's not that they're expensive or there is something definitelywrong, like subprime debt," he says. "It's just so hard to figure out what's goingon below the surface, so by the time you know about a problem, it's too late. It'smuch easier to understand Coke than Citigroup."Other groups to be cautious about include mining and commodity stocks, which haveridden the Asia boom but are vulnerable if the Chinese economy cools. "We're notkeen on them," says London-based Ian Scott, global equity strategist for LehmanBrothers. "We're not heading into a recession, but growth looks like it's slowing,and they've benefited enormously from the growth of the past few years."Speaking of Asia, cautious investors who have profited from the rise in Chineseand Indian stocks might also think about taking some money off the table. "You'vegot to watch what will happen in world markets," says Westwood's Byrne. If creditor global liquidity tightens, markets like Brazil, South Africa, India, and otheremerging investing locales will be the first to feel it. On a recent visit toIndia, Byrne noted that with CNBC broadcasting in both English and Hindi, anincredibly hot real estate market, and tons of new investors, "everyone was in thegame." In volatile emerging markets, that's often as loud a sell signal as you canfind. feedback nschwartz@fortunemail.com[BOX]face=+Bold; UPDATEface=-Bold;WHAT WE SAIDIn "Five Flat Stocks Ready to Rebound" (Oct. 16, 2006) we argued that there wasreal value, and possibly outsized returns, in seeking stocks that had been shunnedby investors, unloved by analysts, and beaten down by the market. We dug up fivecompanies that had healthy prospects, strong balance sheets, and low prices forbargain-hunting investors.WHAT HAPPENEDAll our picks are winners, with five out of five beating the S&P 500, which is up6% since our story ran. Publisher Reader's Digest is the champ, gaining 32% thanksto a $17-a-share buyout by private-equity power Ripplewood Holdings that closedMarch 2. Auto-parts supplier BorgWarner (BWA, $75) comes close with a 31% gain sofar, earned the old-fashioned way--by sound management of the business. Weaknessin the U.S. market resulted in some layoffs and plant closings, but a 20% increasein sales overseas in the fourth quarter of 2006 helped raise expectations for 2007

You might want to take some gains on that one. Sprint Nextel (S, $19) has returnedan impressive 17%, thanks to better-than-expected fourth-quarter earnings and asunny outlook for 2007 The company is continuing its turnaround and has been thesubject of takeover talk. Del Monte Foods (DLM, $11) has delivered an 8% return,driven by growth in the pet food business it acquired in 2005, which offsetintegration charges and rising raw-product and packaging costs. It remains ontrack; nothing has happened that would change our recommendation. The laggard ofthe group, Home Depot (HD, $39), was up 7%. Shortly after our story ran, private-equity rumors boosted the stock, but no deal materialized. Instead, the boardousted CEO Robert Nardelli after complaints about his high pay during a periodwhen the stock was stagnant--and the market applauded. The housing slump is a

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concern here, but new CEO Frank Blake has promised to address the company'sproblems, and the stock is still cheap.[BOX]For more advice on stocks and mutual funds to buy and sell, the latest data, andin-depth research tools, go to FORTUNE on CNNMoney.com.[PULLQUOTE]"IT'S MUCH EASIER TO UNDERSTAND COKE THAN CITIGROUP."Copyright (c) Time inc.,2007. All rights reserved. No part of this material may beduplicated or redisseminated without permission. | NELSON D. SCHWARTZ | | CoreyHajim |[ILLUSTRATION BY SEAN KELLY]; ILLUSTRATION | | [BRIAN SMALE]; MARGARD He likesblue chips with yield.; PHOTO | | [PHOTO] | | [MARK PETERSON--REDUX]; BYRNEShe sees worrisome signs in India.; PHOTO |Document FORTU00020070321e34200008