The largest holdings in the USAA Growth Fund, which has been outperforming the market over the past year, include Apple, Gilead Sciences, IBM, Oracle and Monsanto. The average fund holding's price-to-earnings ratio is 17.5, while earnings have historically grown at 26% annually. In addition, the return on equity and the return on assets of the fund's holdings are higher than their category averages.

"We expect growth stocks to continue to outperform value stock in 2008 in a slower economy," Sweet says. "We also expect certain sectors within value stocks to become oversold in 2008, creating an opportunity to shift back into value stocks. We expect large-cap stocks to continue to outperform small-cap stocks in 2008, as large-cap stocks will do in a slowing economy, and benefit from global sales with a weak dollar."

Sweet says that, outside the charge-offs in the banking and auto industries, corporate earnings continue to be very strong, driven by a healthy expansion in margins. He is also encouraged by the growing consumer class in the emerging markets, the potential recovery of the financial sector and low-cost labor as a result of globalization. But the key to stock performance will be how corporate earnings play out over the next four to six quarters.

Among the factors that could dampen corporate profits are the weak consumer, the potential for shrinking corporate profit margins, a continued strong dollar, concerns about higher taxes and protectionism and the overall impact of the credit crisis on corporate earnings.

Mike Martin, president and chief financial officer with Financial Advantage Inc. in Columbia, Md., has only 6% of his overall portfolio in a few growth stocks that benefit from some inherent competitive advantages. Needless to say, he is not enamored with growth stocks right now. The economy and corporate earnings are poor.

He cites Cerner Corp., a dominant player in hospital information technology that is growing earnings at more than 20% annually. He also likes Mosys Inc., which licenses semiconductor designs and chips used in such items as Nintendo's popular game console Wii. Mosys, which also has a licensing arrangement with LG household durable goods, trades at just $4.50 a share and has $3 per share in cash. He expects earnings to grow at 50% in the future. There also is a chance the company could be taken over.

He is finding better investments on the value side. He sticks with funds such as Third Avenue Value, which has recently purchased distressed bonds that could gain 20% in value when the economy improves. The fund's average holding is selling at just 1.2 times book value. Its largest holdings include
Henderson Land Development, Cheung Kong Holdings, Toyota Industries, Posco and Nabors Industries.

"We need to see growth stock prices knocked down before we buy," he says. "There is a consumer retrenchment, and investors are just starting to realize that earnings may be in trouble."

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