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Biggest companies in S&P get cheap

For bargain hunters * During the technology-fueled bull market of the late 1990s, the S&P 500's biggest companies traded at 49 times forecast earnings. * The top 50 stocks in the S&P 500 now sell at 21 times earnings, or about one-third less than the rest of the index.

Now may be the time to start buying shares of the US biggest companies, according to some investors.

The 50 most valuable companies in the Standard & Poor's 500 Index are cheaper than the measure's smallest 450, according to data from IBES International Inc. In December 1999, as stocks surged toward their peak, the top 50 by market capitalization were twice as expensive as the rest in the index.

"We are finding large caps offer more value than they have for the past couple years," said Vincent Farrell, chairman of Victory Capital Management, which oversees US$75 billion. "In the past, your search would lead you to the smaller companies. Now the search would be pushing you back up the capitalization scale."

Farrell said companies including General Electric Co, American International Group Inc and International Business Machines Corp are attractive based on their price-to-earnings ratio. The three, among the 10 largest in the S&P 500, trade at less than 20 times forecast earnings.

The top 50 stocks in the S&P 500 sell at 21 times earnings, or about one-third less than the rest of the index, according to IBES.

During the technology-fueled bull market of the late 1990s, the S&P 500's biggest traded at 49 times forecast earnings, compared with 24 times for the smaller 450 stocks.

"It is a good time to move up the market-cap scale," said Rafael Tamargo, director of research at Wilmington Trust Co, which manages US$14 billion in stocks in Wilmington, Delaware.

Dipping on doubts

Corporate accounting scandals, declining earnings and a sluggish economy have weighed more on the biggest companies as investors sold stocks with complicated balance sheets and doubted their prospects for profit growth.

The S&P 500 has dropped 22 percent this year. The S&P Midcap 400 Index has slid 14 percent this year and the S&P SmallCap 600 Index has declined 15 percent. Of the benchmark's 50 biggest, only 11 are up for the year, led by Procter & Gamble Co, Anheuser- Busch Cos and Wells Fargo & Co.

General Electric, the world's biggest company by market value, has dropped 30 percent. American International, the largest insurer, has shed 26 percent and IBM, the biggest computer maker, has lost 40 percent.

In the first six months of the year, Tamargo favored mid-sized names such as Bowater Inc, which has a US$2.2 billion market value. Now he is considering buying Eli Lilly & Co, a US$64.7 billion drugmaker. He said he also may buy Procter & Gamble, the largest US maker of household goods.

Richard Bernstein of Merrill Lynch & Co, one of the most bearish strategists on Wall Street, has switched his recommendation to the biggest 50 companies in the S&P 500 from the bottom 450.

Bernstein said those "nifty 50" are the cheapest relative to the "not-so-nifty 450" in more than 10 years.

He still recommends investors keep half of their assets in stocks, the lowest equity allocation among the 13 strategists surveyed by Bloomberg.

The biggest companies are also less expensive because they comprise fewer technology stocks. The NASDAQ Composite Index, half computer and telecommunications companies, trades at 39 times forecasts, according to Bloomberg data. Bernstein estimates that computer-related stocks account for 16 percent of the "nifty 50." They accounted for about a third of the group in March 2000.

Companies such as Yahoo Inc have fallen down the rankings of the biggest stocks as the NASDAQ dropped 75 percent from its peak. Yahoo, which had a market value of more than US$160 billion and sold at some 750 times earnings, has lost 60 percent of its value and now trades at 80 times earnings.
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