NEW YORK - Although investors still have strong doubts about the strength of the economy and the stock market, the ingredients are in place for solid returns in the year ahead, Legg Mason Inc.'s top investment managers said yesterday during the Baltimore-based company's annual investment roundtable here.

"We do think that Oct. 9 was finally the low point of the market," said William H. "Bill" Miller III, chief executive officer of Legg Mason Funds Management Inc. and manager of its well-known Value Trust fund. "But people remain skeptical."

Legg Mason Chairman and CEO Raymond A. "Chip" Mason also used the event to underscore how the firm's transition from a regional brokerage house into a well-diversified asset-management company continues to pay big dividends for the company - despite a stock market that will suffer its third straight year of losses for the first time since the Great Depression.

"If we had remained in the brokerage business only, we would have found things quite difficult over the latest 12 months," Mason told attendees at the fashionable 21 Club. "But as [an asset management] company, we've recorded our best 12 months of revenues ... net after-tax profits and net earnings per share in the history of the company."

Even with the strong market rally that saw stock prices virtually bounce off the Oct. 9 lows referred to by Miller, the company's investment managers said the roaring bull market of the 1990s won't return soon.

Gains uneven

Nor will the gains be across the board, they said.

Two areas that figure to be particularly fertile are the so-called small-cap and micro-cap sectors of stocks, said Charles M. Royce, president of Royce & Associates LLC, the small-cap mutual fund specialty firm that Legg Mason purchased as part of its diversification into asset management.

Micro-cap companies have market values of less than $400 million, while small-cap companies have values below $2 billion, Royce said.

One reason the small-company area is so alluring is that there are so many to potentially invest in - between 8,300 and 10,000 small-cap firms and nearly 7,000 micro-cap firms. The market decline has transformed many former large-cap companies into small caps, according to Royce.

Investing in small-cap stocks is a high-percentage move, he said. During "decent" stock markets, small-cap shares outperform the market about 80 percent of the time, according to a study noted by Royce.

Miller, by comparison, tends to look for specific opportunities, instead of tying himself to a specific stock class or business sector.

Likely to rebound

Though he often invests in companies whose beaten-down shares are likely to rebound, Miller also will buy stocks that haven't been savaged, in companies he expects will have substantial earnings growth.

Some of Miller's most recent purchases include Comcast Corp., Home Depot Inc. and General Electric Co. With Comcast, Miller said, his calculations show a chance for the stock to double over the next three years.

He likes Home Depot because the company is buying back its stock, which helps increase its earnings per share, and because it is taking aggressive steps to improve its internal efficiency.

And GE's share price isn't adequately reflecting its high dividend yield and potential for strong, predictable profit growth, Miller said.

Legg's executives said they expect the economy to improve throughout 2003. While consumer spending continues to be the main force supporting the U.S. economy, Miller said, spending by businesses is starting to pick up and that companies will soon be forced to ramp up their rate of investment.

Companies are depreciating their factories, equipment, hardware and software faster than they are spending to replace them, a situation that can't logically continue much longer, Miller said.

A bump up in spending would certainly boost the economy, corporate profits and share prices, he said.

Then there's the potential for a war with Iraq.

Miller said he believes that a short war is already priced into the stock market. That's because a victory would remove Saddam Hussein from power, and the occupying forces would likely increase oil production as a means of raising the money needed to rebuild Iraq. With that increase, oil prices could drop by as much as $10 a barrel - giving the U.S. economy a terrific boost, Miller said.

But a prolonged war - or one with a bad outcome - would very likely hurt the economy in ways that will only be known when it happens, Miller said, although he added that he doesn't see that occurring.

"If we have a conflict, it will be the best-advertised conflict in history," Miller said.

"The market is aware of the conflict. What's to be determined is the outcome ... if oil prices ended up dropping $10 a barrel, the oil companies would still make money, but $18 [a barrel] oil would be the greatest stimulant to the economy."