"Nearly two years later, however, it's clear that AIG was no Enron. Under CEO Martin Sullivan, a 30-year company veteran, AIG has survived restating five years' worth of earnings, has paid billions to settle fraud charges with government authorities, and is reporting impressive profit growth once again. Led by a strong showing in its property and casualty business, the company registered a 38 percent jump in net income in the first three quarters of 2006 before investment gains or losses, to $11.6 billion. As Don Yacktman, who recently purchased more than 100,000 shares for his Yacktman Funds, puts it, "A little bit of plastic surgery and - voilà! - the ugly duckling becomes a swan.""

"We've been recommending Altria Group for the past several years, and the stock has consistently been one of our best performers. We're picking it again for 2007. With about $100 billion in sales, the company - love it or hate it - is the world's largest cigarette maker and, through its Kraft Foods subsidiary, one of the biggest food processors. In the U.S., Marlboro, the top-selling cigarette brand, continues to thrive by stealing share; it now controls 41 percent of the market. Overseas sales are growing rapidly. The company now accounts for 60 percent of cigarette sales in Mexico, nearly 40 percent in Western Europe and 25 percent in Japan."

"With oil and natural-gas prices easing from their 2006 peaks, buying into a big energy company might seem dangerous. But barring an unforeseen collapse in commodity prices, ConocoPhillips should turn in a solid performance. Formed by the 2002 merger of midsized oil firms Conoco and Phillips Petroleum, the Houston energy company is the third-largest U.S. oil operator, behind Exxon Mobil and Chevron. With total U.S. refining capacity of 2.2 million barrels a day, it's the nation's second-largest refiner after Valero. And thanks to its recent $35 billion purchase of Burlington Resources, ConocoPhillips is the country's largest natural-gas producer. This diverse business mix helps smooth earnings."

"It's not often that you find stock investors and commodities traders betting on completely different economic outcomes. But that's exactly the disconnect that exists today with oil. Consider contract oil drillers like Diamond Offshore, Ensco, and Noble - vendors that hire out their drilling rigs to the likes of Chevron and Exxon Mobil for a daily fee. The rise in oil prices over the past few years has caused the day rates they charge for their rigs to skyrocket along with their share prices. Analysts expect Diamond's earnings to rise 178 percent in 2006, and since most of its rigs are already under contract at even higher rates for next year, analysts are expecting earnings to jump another 86 percent in 2007. "We're booking rigs out into '08, '09 and even 2012 at very high rates," says Diamond Offshore president Larry Dickerson, who notes that such contracts are rarely broken. "I'm not sure the stock market appreciates the strength of earnings that are going to come in '08 and '09."

"Here's another reason to play defense: "Solid economic growth and the surge in global commodity prices have provided the liquidity necessary for a number of countries to fund arms buildups," Merrill Lynch chief investment strategist Richard Bernstein wrote in a recent report. Over the past several months the Pentagon has announced plans to sell $450 million in Northrop Grumman communications equipment to Jordan, $2.9 billion in General Dynamics Abrams tanks to Saudi Arabia, and $144 million in Lockheed Martin-made Patriot missiles to Japan."

"Joy Global makes equipment for the mining industry, coal mining in particular. When commodity prices were soaring, so were Joy's shares - from $5 in January 2003 to $70 last April. But when prices began to fall, investors fled. As with many selloffs, this one was grossly overdone. Even with coal and copper prices now 25 percent off their midyear highs, analysts still expect Joy's earnings to grow 22 percent next year. "Yes, the price of coal has taken it on the chin," says portfolio manager and Joy fan John Buckingham of the Al Frank fund. "But the dropoff in its business didn't justify the huge decline in the stock price." As a result of the decline, the stock looks cheap - trading at a modest 15 times 2007 earnings."

"Microsoft is launching the broadest barrage of new products in its 30-year history. In November it released Vista, the new version of the Windows operating system, and Office 2007, an upgrade of the popular software suite. Both businesses average operating margins of more than 70 percent, and they generate about 80 percent of Microsoft's total profits. And with Windows running on more than nine out of every ten computers in the world, the market is enormous. Other new products: everything from business servers to the new Xbox videogame machine. After several stumbles, there's also evidence that Microsoft is getting Internet religion. In October the company struck a deal with Novell, a longtime enemy that is now a proponent of Linux, the open-source operating system that competes with Windows. The agreement makes it easier for customers to use both Windows and Linux software alongside each other on big computers, essentially brokering a peace between two opposing camps in the software industry."

"When J.P. Morgan Chase purchased Bank One in 2004, it also acquired the considerable management talents of that company's CEO, Jamie Dimon, who had turned around what was arguably the worst-run big bank in the country. Since taking the helm at J.P. Morgan, the brash Queens native has largely followed the same playbook he used at Bank One - installing new managers, meshing computer systems, and axing pricey outsourcing contracts. His efforts are paying off. Led by its robust investment-banking and wealth-management arms, the company is expected to report a 25 percent jump in earnings in 2006."