THE STOCK market is becoming a scary place to plunk down the family fortune. In a matter of months, a nervousness has crept into the market spurred by worries that the government will never balance its budget, that food prices are rising and the overall economy is slowing.
Many investors, who last year lighted fat cigars with $100 bills celebrating the huge gains they made in stock, have turned skittish.
That doesn't mean it's time to bail out of the market, local experts say.
"To make money, you are going to have to be a real cherry picker," said Richard Cripps, chief market analyst with Legg Mason Wood Walker Inc.
"It's not a market where you have the rising tide lifting all boats. Investors should have relatively modest expectations going forward."
So, the experts are embracing companies that are downright ugly because there's little to lose and they have plenty of upside potential.
Jeffrey Saut, director of research with Ferris, Baker Watts Inc., likes a handful of regional firms with as many bumps and bruises as a hockey player.
American Safety Razor, a Verona, Va.-based company that is the nation's largest supplier of generic razor blades, is one of his favorites.
The company's stock has been pounded to around $8 a share from a high of $14.50 14 months ago, after difficulties unveiling a new movable-blade cartridge designed to compete with the Gillette Sensor.
"Their problems have been addressed," said Mr. Saut, who has shaved with the razor.
"I can't tell the difference between it and the Gillette Sensor, and it's 45 percent cheaper."
He expects American Safety to earn $1.10 a share for 1996, up from 95 cents last year.
"We actually think that $1.10 could be conservative," he said.
"People are going to shave even if there is a recession," he said.
Integrated Health Services in Owings Mills is another that he considers damaged goods, but with plenty of potential.
The company specializes in taking care of patients in facilities outside hospitals to reduce health-care costs.
The stock was flying at the beginning of the year in the $40-a-share range, but then it was crushed when the company said profits could be hurt because of potentially lower reimbursements from Medicare and Medicaid patients.
"It's cheap," Mr. Saut said of the stock, which trades in the $25-a-share range.
He expects earnings to grow at 15 percent to 20 percent over the next several years. He estimates that the company will earn $2.21 for 1995, and earnings will be flat in 1996.
"This is kind of a transition year; we think the growth rate will resume in 1997," he said.
"Once the worry clears over reimbursement, they'll resume their winning ways. The last shall be first and the first shall be last."
Larry J. Puglia, co-manager of T. Rowe Price's Blue Chip Growth Fund, likes big companies that are market leaders. His picks have served the fund well. The Blue Chip fund was up 37.9 percent last year, beating the Standard & Poor's 500.
But Mr. Puglia isn't above picking the downtrodden. One of his favorites is IBM. He thinks it's one of the true bargains on the Dow since it is trading in the $87-a-share range.
"The balance sheet is dramatically improved, and the company has significant cash on the balance sheet which is allowing it to buy back its shares aggressively," he said.
Another reason he favors IBM is that it is one of the world's largest systems integrators and out-sourcing companies, which means that it provides businesses worldwide with mainframe and personal computers and data processing and then services the products.
The business represents 20 percent of IBM's revenues, Mr. Puglia said.
"They have a major backlog in the business, and long-term contracts," he said. "If you value just that business alone, it is worth $40 to $50 and the stock is trading at $87."
IBM is expected to earn $12.20 a share in 1996, or less than eight times earnings, Mr. Puglia said.
He also likes First Data Corp. of Hackensack, N.J., the leading processor of credit-card transactions in the world. Each time a consumer slaps a purchase on plastic, First Data is there to make sure the transaction goes through.
"It earns a fee for each transactions it processes," Mr. Puglia said. "This is more of an expensive stock, but you are buying a 20 percent grower for less than 20 times estimated 1997 earnings."
Legg Mason's Mr. Cripps has his favorites, too. He likes AO Smith Corp., a Milwaukee-based company that makes car frames and water heaters. It's a blocking and tackling business, but the water heater side has plenty of international potential, he said.
The stock is selling at just six times estimated 1996 earnings of $3.50 a share. Average stocks are selling at 15 times their earnings.
"With this stock here we don't feel we have a lot of risk," Mr. Cripps said.
He's also high on Chicago-based General Instrument Corp., which provides equipment to cable and satellite television industries. It's trading in the $22 range, down from the $41 level.
The company makes the box for cable companies and does infrastructure work. If and when the cable industry is deregulated, General Instrument could be flooded in business because all cable firms would have to upgrade their systems, he said.
He estimates that the company will earn $1.45 a share in 1996 and more than $2 in 1997.
"At this price, General Instrument is more than discounted," Mr. Cripps said.
"What investors have to be concerned with are owning stocks where expectations are too high."