JIM MARGARD BEGAN HUNTING for treasure at the age of about 10. In his spare time, he'd hunker down in his New Mexico home and comb through thousands of pennies, nickels, dimes and quarters purchased from the local bank in hopes of spotting something rare and valuable. On one occasion, he struck gold, so to speak. "I realized I had found an entire roll of dimes containing only rare Mercury-head coins," he says, savoring again the memory of that mother lode.

Margard, 54, is still digging for hidden treasure and assets that trade for less than their real value. But these days his chosen hunting ground is the stock market, and he can't count on serendipity to help him out. Instead, running Rainier Large-Cap Equity, one of the half-dozen funds managed by Rainier Investment Management, "takes a lot of discipline and hard work," he says. Working outside big financial centers like New York, Boston or San Francisco -- Rainier is based in Seattle -- helps Margard and his colleagues maintain the necessary focus. "We don't get distracted by the noise," he says. "We're able to retain our own distinctive culture, to think and act independently."

The recipe seems to be paying off. Over the past five years, Rainier Large Cap Equity (ticker: RIMEX) has beaten not only its benchmark, the Standard & Poor's 500-stock index, but also its peers, as defined by the mutual-fund-rating service Morningstar. So far this year, the fund is up about 12.28%, more than double the S&P 500. Last year it posted a 12.25% advance.

"These guys are absolutely insistent on identifying companies that are growing faster than the market but trading at prices below the market's average," says Andrew Gunter, a mutual-fund analyst at Morningstar who tracks the Rainier fund group. "There's nothing new in this growth- at-a-reasonable-price concept, but their die-hard approach means their returns and outperformance have been remarkably consistent."

That's just what Margard and his five-person team are after. They don't want to be superstars. "We're all just working dogs," he says. "We keep our noses down and our eyes open for the right opportunities."

To boost the odds of spotting candidates for the fund, Margard divides the stock market into 10 sectors, each tracked by at least two team members, with three working on the more complex health-care and technology sectors. Team members, whose backgrounds range from teaching to construction work on the Alaska pipeline, hash out ideas among themselves, and bring the best to the table for the whole team to discuss.

There's no bonus system, so managers responsible for tracking out-of-favor sectors aren't punished for the market's idiosyncrasies. "All six of us benefit in proportion to our ownership in the firm and its overall performance," Margard explains.

Further reinforcing that unity, Rainier employees, from the receptionist up, agree to cease trading through personal brokerage accounts upon joining the firm. "That way, no one gets distracted by personal portfolios and everyone is fixated on managing the fund for our clients," he says.

Margard and his colleagues are scornful of the notion that growth -- especially growth at a reasonable price -- isn't available in certain market sectors. "There are certainly some parts of the market, like utilities, where the sector as a whole isn't very 'growthy,'" says Peter Musser, Margard's fellow manager.

But that doesn't mean the team is excused from trying to find an attractive investment in the industry. "It's up to us to find a company that is growing at 6% annually when the industry is expanding by only 3% or 4%," Musser says.

That approach ensures the Rainier fund usually is invested in every major market sector, although Margard admits it hasn't owned an auto stock or home builder "in years and years."

To combat another peril associated with growth funds -- the tendency to overweight a few big sectors where growth stocks are abundant and easily identifiable -- Margard and his team keep their sector holdings to within five percentage points of the S&P 500 weighting. "Often the next market leadership comes from outside the realm of the popular growth-stock arenas, in a few smaller sectors where the typical growth-fund manager isn't looking," he says.

In 2002 to 2004, for instance, Musser identified industrial and energy stocks "with huge growth potential," even though these sectors aren't the usual hunting grounds of growth investors. But the move paid off.

The Rainier team expects many of those stocks to continue to outperform this year. The fund has owned Precision Castparts (ticker: PCP), a supplier of large castings, including structural parts for jet engines, for the past three years or so. When the stock's price topped $140 a share earlier this year, Margard trimmed its holdings, only to resume buying in the summer, when the market's volatility drove the stock down to a low of $110 in intraday trading.

"When you get wild market swings in stocks where you have conviction, you have an opportunity to add to your position amidst indiscriminate selling," Musser says.

While Margard and his colleagues try to keep their cool amid market volatility, they also consider what it might mean for their holdings. After owning Goldman Sachs (GS) for several years at an average purchase price "significantly below" $100 a share, they sold the last of their stake this summer at prices between $195 and $220. "Goldman had done very well; what concerned us was how they were going to sustain the pace of earnings growth given their reliance on merger-and-acquisition activity and fixed-income trading," businesses that could feel disproportionate pain this year, Margard says.

Rather than keeping a stake in Goldman, with questions about its earnings growth, the fund raised its holdings in other stocks, such as Foster Wheeler (FWLT). "It's a company with very visible growth for years into the future; its business is generated under long-term contracts and isn't really affected by subprime or credit-crunch issues," Margard says.

The engineering and construction concern designs and manages boilers and power plants for refiners. Margard began buying the stock when it traded in the 80s; today it's near 126 after a brief dip to around 90 -- an opportunity for the Rainier team to pick up more shares. Margard expects Foster Wheeler's earnings to grow 105% this year, and double again in 2008.

Such earnings expectations are typical of most of the Rainier fund's portfolio holdings. Consensus estimates call for S&P 500 earnings growth of 11.7% this year, but the forecast for the fund's holdings is for 17% growth. Meanwhile, its average price-earnings ratio is 14.9 -- nearly the same as the market's P/E. "We pay an average price for above-average growth," says Musser.

These days, Margard and his colleagues find growth in some intriguing areas. They're fans of Transocean (RIG), a deep-water oil and gas driller they began buying at about $34 a share in 2004. The company earned $4 a share last year -- "It's the most competitive deep-water driller out there, and that's a growing business," Margard says. And it's on track to earn $14 a share by 2009, the Rainier managers believe.

A stock doesn't have to be off the beaten track to pop up on Rainier's radar. The fund has a large stake in Procter & Gamble (PG), which looked anything but "growthy" in the days when Amazon.com dominated the growth-stock universe. "But the stock price is rising; it's the world's greatest consumer company, and earnings growth is likely to be about 14% annually over the next few years," Margard says.

An additional selling point: P&G has relatively little debt to capital, and generates enormous amounts of free cash flow.

As fear sweeps the financial markets, Margard says he's studying his holdings for signs they might be sideswiped either by the market's volatility or an economic shift that would alter the earnings-growth outlook. "It is a dangerous time," he says. "There are situations beneath the surface that aren't fully visible to us, and you need to keep that risk in mind and be prudent in what you own."

Morningstar's Gunter adds: "This is the kind of market environment where people may end up favoring consistency and the idea that by doing your research, you can beat the index" by a few points every year.

That's just what Margard and his fellow "working dogs" count on in their quest for investment treasure

TO CALL THIS SUMMER A NERVOUS one for investors is to traffic in understatement. The stock market suffered its first correction in 4½ years when the Standard & Poor's 500 skidded 12% recently. The Dow Jones Industrial Average makes triple-digit jumps or slides -- often within a single day. The mood swings come fast and furious as mortgage defaults rise, lending conditions tighten and traders grapple with the impact on the economy. And that's all before September, traditionally a volatile month for stocks.

So it might be reassuring to some -- and surprising to others -- to hear how Wall Street's top strategists calmly expect stocks to finish the year higher. In fact, the eight strategists surveyed by Barron's see stocks climbing well into 2008, despite the credit-market tumult and the policy uncertainty of the election year.

The average forecast among the eight calls for the S&P 500 to reach 1568 by New Year's Eve, or 6.4% higher than today's level of 1474, and even the most cautious have penciled in hardly any downside for stocks. In contrast, their economic prognosis is far less assured and unanimous: Three firms see economic threats grave enough to require the Federal Reserve to slash interest rates to 4.5%, from 5.25% today, while two others think the economy is doing just fine.

The strategists' bullish tilt is especially remarkable considering how many believe the financial markets have altered for good, with the days of easy money and cheap debt fading like the summer heat. "We've been through a long period of extraordinarily easy credit, and there's no putting that genie back into that bottle," says Tom McManus, Banc of America Securities' chief investment strategist.

Instead, what lies ahead is "a multiyear period of credit rationalization, reduced leverage and less speculation, and a shift toward more fundamental investing," says Merrill Lynch chief investment strategist Richard Bernstein. "We're not going back to how things were -- not even if the Fed cuts rates and floods the market with money."

Larry Adam
Deutsche Bank

S&P 500
Year End:1550
12 Months: 1650
10-yr Treasury Yield: 5.0%
Fed-Funds Rate: 5.0%
S&P 500 Op Profits '07E: $96
'08E: $107
Favored Sectors: Info tech, health care, industrials, energy

So what drives their sanguine stock outlook? The strategists expect U.S. profit growth to accelerate, driven by the engine of a global economic boom. All are counting on interest rates staying meekly cooperative.

Over the past few years, strategists have generally been bullish in Barron's twice-yearly surveys -- and they have mostly been right. The jury is still out for this year. Last December, the group had called for an average 8% gain for 2007, and the S&P 500 had rallied 9.5% to a record 1553 mid-July. But after falling quickly to 1371 by mid-August, it is up just 3.9% for the year.

Richard Bernstein
Merrill Lynch

S&P 500
Year End:1530
12 Months: 1560
10-yr Treasury Yield: 4.25%
Fed-Funds Rate: 4.5%
S&P 500 Op Profits '07E: $93
'08E: $92
Favored Sectors: Health care, consumer staples, telecom, industrial

In the latest survey, performed in mid- and late-August, one of the most bullish strategists was François Trahan, chief investment strategist at the broker-dealer and investment advisory firm ISI Group. He thinks the economy is in the throes of a mid-cycle slowdown brought on by 17 interest-rate hikes -- but he doesn't see the economy weakening enough to trigger any immediate rate cuts.

"People also equate the credit crunch with a liquidity crunch, and that's wrong," Trahan says. Among other things, cash on corporate balance sheets is high, at nearly 15% of the stock market's total valuation, and the influx of petro-dollars and global money-supply growth all make for abundant liquidity. Trahan stands by his year-end S&P 500 target of 1700, which he set this spring, and he favors cyclical sectors like materials, industrials and technology. He shuns rate-sensitive financial stocks and counter-cyclical sectors like utilities and consumer staples.

David Bianco
UBS

S&P 500
Year End: 1600
12 Months: 1650
10-yr Treasury Yield: 4.5%
Fed-Funds Rate: 4.75%
S&P 500 Op Profits '07E: $95
'08E: $101
Favored Sectors: Industrial, energy, technological, financials

AUGUST'S JITTERY STOCK slide also was seen as a contrarian Buy signal. "Investors are very nervous right now, and embedded risk premium is higher than warranted," says Goldman Sachs' Abby Joseph Cohen. "The stock market is undervalued relative to its fundamentals." In addition, corporations' balance sheets are in "excellent shape," with enough liquidity to finance new jobs, strategic acquisitions and business expansion.

Downside stock risk is further limited by stocks' moderate valuation, the strategists say. The S&P 500 is trading at 15.9 times its operating earnings over the past four quarters -- within the valuation "bull's eye" of between 14 and 16 times, notes Citigroup's Tobias Levkovich. Since 1940, a price-to-earnings in that range has produced strong returns averaging 17% in the next 12 months.

Abby Joseph Cohen
Goldman Sachs

S&P 500
Year End: 1600
12 Months: 1680
10-yr Treasury Yield: 4.75%
Fed-Funds Rate: 4.5%
S&P 500 Op Profits '07E: $93
'08E: $100
Favored Sectors: Energy, info tech, industrial

Robert Parker, a London-based senior member of Credit Suisse's global investment committee, sees U.S. economic growth slowing to about 2% in the second half. But large U.S. companies' exposure to robust European and Asian growth, along with a weak dollar, will stave off a U.S. recession. As the debt market backs off, the "mountains of LBO cash that had been raised will increasingly be used to take large minority positions" in public companies, with private equity looking to boost returns through operational restructuring or management change -- as opposed to financial leverage.

Will defaults spread quickly from subprime through the credit spectrum? How will stricter lending affect Americans' relentless spending? Will companies keep hiring if consumer spending slows? As long as questions like these persist, Larry Adam, Deutsche Bank Alex. Brown's chief investment strategist, will favor stocks hitched to business spending over those dependent on consumers. He is also steering toward companies with foreign sales, strong pricing power and reduced sensitivity to interest-rate movement.

Tobias Levkovich
Citigroup

S&P 500
Year End: 1600
12 Months: 1725
10-yr Treasury Yield: 4.90%
Fed-Funds Rate: 4.5%
S&P 500 Op Profits '07E: $94.75
'08E: $101.75
Favored Sectors: Info tech, energy

Merrill's Bernstein has a short list of five investment themes. He believes, for instance, that better value can now be found in developed markets than in emerging ones, which have attracted hordes of investors that have fully priced in the growth potential. Risk-averse investors also should be guided by dividends and cash holdings, he says. Other areas to focus on in this volatile market include high-quality bonds, large-cap stocks and defensive sectors.

In fact, large-cap stocks and foreign sales exposure have become such recurring themes one might question the wisdom of such popular ideas.

"Yes, some of these trades may be crowded," says Goldman's Cohen of the preference for large-cap stocks and global exposure. "But it's still worthwhile if its price-to-earnings or price-to-book valuations are still attractive. The consensus is not always wrong."

Tom McManus
BofA Securities

S&P 500
Year End: 1465
12 Months: 1590
10-yr Treasury Yield: 5.10%
Fed-Funds Rate: 5.0%
S&P 500 Op Profits '07E: $93
'08E: $102
Favored Sectors: Consumer staples, health care

IN CONTRAST, A DISTINCTLY uncrowded sector where strategists have feared to tread is financials, given the worsening fallout from the debt market. But it is precisely this aversion that leads David Bianco, UBS Securities' chief U.S. equity strategist, to nudge financials onto his roster of favored sectors (albeit behind industrials, energy and technology).

"Financial stocks have been priced for disaster," he says. Another catalyst: a belief that the Fed might soon cut rates to 4.75%, and financial stocks' historical outperformance as rates fall. Bianco likes big-bank stocks including Bank of America (ticker: BAC), in part for its 5% dividend yield, and capital-markets stalwarts like State Street (STT).

Robert Parker
Credit Suisse

S&P 500
Year End: 1500
12 Months: 1575
10-yr Treasury Yield: 5.20%
Fed-Funds Rate: 5.25%
S&P 500 Op Profits '07E: $102.60
'08E: $112
Favored Sectors: Technology, health care, telecom, media

Meanwhile, the energy sector has shone in recent years and remains a proxy for global growth. Valuations remain modest, and cash-rich balance sheets help inoculate against constricting credit. "With powerful cash flow, the energy sector is not likely to be burdened with debt," notes Citigroup's Levkovich, who favors integrated oil and gas companies.

Tech attracts strategists for various reasons. Credit Suisse's Parker, for one, sees increased capital spending on technology infrastructure, especially on "tech nuts and bolts" companies like the network equipment bellwether Cisco Systems (CSCO). Merrill's Bernstein sees large tech stocks increasingly as stable defensive bets.

"A handful of large tech stocks have dividend yields better than the market," he says. In addition, some have lower betas, or are less volatile, than the market, and "sentiment toward tech has been so negative for so long."

François Trahan
ISI Group

S&P 500
Year End: 1700
12 Months: N.A.
10-yr Treasury Yield: 5.0%
Fed-Funds Rate: 5.25%
S&P 500 Op Profits '07E: $95
'08E: $103
Favored Sectors: Materials, industrials, technology

What keeps the strategists up at night? Wall Street expects the pillar that is the job market to hold up, even as financial-services firms cut more than 25,000 positions in August. So any signs of job weakness -- the unemployment rate climbing to 5%, or two consecutive months with job additions falling below 100,000 -- will cause consternation.

With S&P 500 profits increasingly supported by exports, the threat of protectionism -- and retaliation by trading partners like China -- also looms as a worry.

Monetary risk lurks, too. "If the Fed were to cut rates at a time when the European Central Bank is tightening, the dollar will just melt down -- and that's not a good scenario," Trahan says.

Measures of inflation have largely behaved since peaking a year ago, but BofA's McManus cautions against writing off inflation risk. "Most people expect a slight rise in unemployment to help quash inflationary pressure, but that's in an environment of commodity deflation," he says -- not today's backdrop of surging global prices.

Not surprisingly, all eyes are on commodity prices. "Firm commodity prices are a good indication of healthy global growth," UBS's Bianco says. After all, the strategists are counting on global growth to stay strong enough to prop up the U.S. economy, but not so strong that inflation is imported. It's a fine line, with little margin for error.