The bigger they are ...

Large stocks gave their mid-cap counterparts a run for their money

After a fantastic three-year run and a 12% gain, analysts expected the stocks of he mammoth companies atop the S&P 500 to slow down. Much to their surpise, though, large-cap stocks, up 24% in the last quarter of 1998, once again managed to outpace those of small and mid-sized companies poised for growth.

Last August, portfolio manager Richard Garriques, who at the time was with New York-based Bond Procope Capital Management, recommended five mid-sized growth companies with market capitalizations of between $500 million and $12 billion.

Three of Garriques' picks, CenturyTel (NYSE: CTL), Guidant (NYSE: GDT) and Northern Trust (Nasdaq: NTRS), demonstrated that the best of the mid-caps grow up to be big boys. The other two, PeopleSoft (Nasdaq: PSFT) and Sterling Commerce (NYSE: SE), showed that some investors took their money out of the more volatile mid-cap sector and instead rushed to the familiar large players on the S&P 500 index.

Of the five stocks, Guidant scored the most impressive gains, returning 56.15% over the year ended June 1. "We still like this one," says Bond Procope President Alan Bond. "We still see medical devices as a rapidly growing industry." He adds Guidant has the potential to return 25% to 45% over the next couple of years.

CenturyTel (formerly Century Telephone Enterprises), which was on the S&P 400 (the mid-cap benchmark) at the time it was recommended, was recently added to the S&P 500. The telecommunications company has had tremendous growth, posting a 35.84% return over the past year. Bond says CenturyTel has created a real solid niche for itself in the area of cellular phones, long distance service and local telephone business. Bond adds that CenturyTel is a steady performer that shareholders will want to buy and hold on to.

The biggest disappointment of last year's picks was PeopleSoft, which slumped 62.61% over the 12-month period. It was down from $42.63 a year ago to $15.94 at press time. After putting all of its eggs in one basket--positioning itself as a Y2K computer problem solver--PeopleSoft found itself walking on eggshells. Until the company broadens its product base and services, Bond advises shareholders to cash out.

As for the remaining two picks, Northern Trust was up 27.61% since its recommendation, benefiting from the 401(k) boom (both institutional and individual money). And Sterling Commerce's stock has been on a roller-coaster ride, rising to a 52-week high of $48.75 before dipping to $37.38, or a negative return of 0.32%.

Three Out of Five Isn't Bad

                                       Current        Price at
Stock (Exchange: Symbol)               Price(*)     Recommendation

Guidant Corp. (NYSE: GDT)             $49.56(**)       $31.74
Sterling Commerce (NYSE: SE)           37.38            37.50
PeopleSoft Inc. (Nasdaq: PSFT)         15.94            42.63
Northern Trust Corp. (Nasdaq: NTRS)    90.13            70.63
CenturyTel (NYSE: CTL)                 40.50(***)       29.82
Portfolio Performance

                                                Current Value
                                      Total       of $1,000
Stock (Exchange: Symbol)              Return     Investment

Guidant Corp. (NYSE: GDT)             56.14%       $1,561
Sterling Commerce (NYSE: SE)          -0.32           997
PeopleSoft Inc. (Nasdaq: PSFT)        -62.61          374
Northern Trust Corp. (Nasdaq: NTRS)    27.61        1,276
CenturyTel (NYSE: CTL)                 35.84        1,358
Portfolio Performance                  11.33%      $5,566

                                      Est. 5-Yr.
                                      Annual EPS
Stock (Exchange: Symbol)                Growth

Guidant Corp. (NYSE: GDT)               20.13%
Sterling Commerce (NYSE: SE)            28.20
PeopleSoft Inc. (Nasdaq: PSFT)          23.14
Northern Trust Corp. (Nasdaq: NTRS)     12.70
CenturyTel (NYSE: CTL)                  14.34
Portfolio Performance

(*) As of 6/1/99

(**) 2-for-1 stock split as of Jan. 28, 1999; price at recommendation before split was $63.50.

(***) 3-for-2 stock as of Apr. 1, 1999; price recommendation before split was $45.

Sources: Big Charts, Yahoo! Finance, and Zacks Investment Research.

RELATED ARTICLE: B.E. BASICS

When P/E ratios just won't cut it

Other ways to value stocks find favor

A long time ago, in a market far, far away, price-to-earnings ratios were considered an adequate measure of a stock's intrinsic value. But with the bull market now more than eight years old and with stock prices soaring, P/E ratios have become so astronomically high that some analysts today question whether they are an accurate gauge of a stock's worth.

By old Wall Street standards, stocks with P/Es of 20 were overvalued and not considered good growth prospects. But that rule of thumb has less relevance in today's market, when even cyclical stocks such as Minnesota Mining & Manufacturing Co. (NYSE: MMM) trade at a P/E of roughly 23.9.

As a result, analysts and fund managers are relying more on alternative methods of valuing stocks. The following is a glossary of such terms, as well as more basic definitions:

* Price-to-earnings ratio or P/E ratio. The P/E ratio, also called the multiple, is still the most common way to value a stock. It is the price of a stock divided by its earnings per share. It's usually calculated using analysts' consensus estimates of next year's earnings, known as the forward P/E.

For example, a stock selling for $20 that earned $1 last year has a trailing P/E of 20. If that same stock has projected earnings of $2 a share, it will have a forward P/E of 10.

* Book value. This is the net asset value of a company's securities. It is calculated by figuring a company's total net asset value, then dividing that amount by the number of shares of common stock, shares of preferred stock or bonds outstanding. Book value is one tool used to determine if a stock is underpriced and therefore a good buy.

* Dividend yield. The annual rate of return on an investment expressed as a percentage. For stocks, it is the annual dividend divided by the purchase price. It's also called the current yield.

* EBITDA. The acronym stands for earnings before interest, taxes, depreciation and amortization. Also called cash flow, it is figured by taking a company's net income, adding depreciation and amortization, then subtracting capital expenditures (how much money the company invests each year on plant and equipment). EBITDA is used primarily to value broadcasting and telecommunications stocks, companies with large investments in capital improvements.

* Price-to-sales ratio. A stock's capitalization divided by its sales over the trailing 12 months. The value is the same whether the calculation is done for the whole company or on a per-share basis.

If you want to find out more about financial terms on the Web, visit www.investorwords.com.--Ivan Cintron3