IS PARTY OVER FOR BIG BOYS? : LARGE-CAP STOCKS MAY TUMBLE, EXPERTS SAY.

Byline: Patricia Lamiell Associated Press 

The stocks of large companies consistently have outperformed the broader stock market so far this year, but some experts are shifting to smaller companies or foreign stocks to prepare for what they're calling the inevitable end of the big-stock party.

After a bruising 10 percent correction in March, the Dow Jones industrials and the Standard & Poor's 500 index produced total returns of about 2.6 percent during the first three months of the year. That compares with a total return on the Nasdaq index of -5.32 percent, and -5.17 percent for the Russell 2000.

``The trend toward big-caps is very powerful now and it may continue awhile longer,'' said Arnold Kaufman, editor of The Outlook newsletter at Standard & Poor's Corp. ``I don't see it ending imminently, but it should end before long.''

Over the past 65 years, small- and mid-capitalization stocks have produced total returns of about 13 percent, while the S&P 500 has returned about 10.5 percent, said Ned Riley, chief investment officer at Bank of Boston.

``Smaller companies by definition have a higher projected earnings growth,'' Riley said. ``Eventually, investors will have to look for growth at a reasonable price.''

His picks include technology and health-care stocks. ``Both fit with the aging of the population and productivity enhancement in the future,'' he said.

Rao Chalasani, chief investment strategist at Everen Securities in Chicago, adds that there are already good values in the shares of smaller companies.

Software companies are attractive from a market-growth standpoint, Chalasani said, while retailers and consumer stocks have fallen enough to make them good buys.

For short-term investors, however, shifting to small stocks is not the proper strategy, Kaufman said, because when big stocks finally give up, they will drag the entire market down.

``The second tier does not go forward when the first tier retreats,'' he noted.

Instead, Kaufman believes that once big stocks begin to wither, investors should raise cash or turn to alternative investments. Bonds, for example, should show better returns if the Federal Reserve continues to raise interest rates, which many believe it will.

Abby Joseph Cohen, Goldman Sachs & Co.'s market strategist, likes small-caps too, but for a different reason. Their stock prices do not rise as quickly with earnings gains as do the stock prices of larger companies, she said, making small- and mid-cap shares a better buy.

Joseph Battipaglia, chief investment strategist at Gruntal & Co., agrees. ``Many big-cap stocks are trading at multiples greater than their underlying growth rates in revenues and earnings,'' he said.

Battipaglia favors what he calls ``the main drivers behind the economy,'' such as technology, finance, health-care and industrial equipment companies. Consumer nondurables, however, like soap and entertainment companies, ``carry a fairly rich valuation.''

Peter Canelo, market strategist at Dean Witter Reynolds Inc., doesn't like financial or utility stocks right now because they would be hit hardest if short-term interest rates rise more than half a percentage point. He believes that once the time comes, investors shouldn't bother with small-cap stocks but move straight to cash.

But it's too soon to jump from the index funds that have been performing so well, Canelo said, adding: ``You're not yet in a bear market. We think the market can still make new highs, probably before midsummer.''

James Troyer, a principal and portfolio manager at The Vanguard Group, said small and large companies tend to perform differently at different points in the business cycle. Investors have many theories, but no hard proof, of why. That's what makes stock-picking entertaining to some.

In the long run, however, large and small companies tend to return about the same, Troyer said. He therefore suggests that long-term investors aim for a mix of large to small companies that approximates the market itself.

The S&P 500 components represent 72 percent of the market's total capitalization, Troyer said, so investors should try to weight their portfolios the same way.