I like this . . . btw, it posted at 9pm eastern time.
Salomon focusing on small and mid-cap U.S. stocks
By Daniel Bases
NEW YORK, March 23 (Reuters) - They may be giants, but the days of blindly buying big-cap stocks are coming to an end, at least according to Salomon Smith Barney's U.S. equity strategy team.
Investors should shift their focus toward small and mid-cap stocks as an area of growth, and away from the large-cap stocks that make up the the Dow Jones industrial average and drove it to record highs last week, the team said on Tuesday.
The Dow 30 is the world's most watched index, despite its relatively narrow slice of the entire stock market.
''Today I am less enthusiastic for these big-cap growth stocks,'' said Marshall Acuff, U.S. equity strategist at Salomon Smith Barney, the brokerage arm of the world's largest financial services company, Citigroup (NYSE:C - news).
Speaking to journalists here, the team emphasised the relatively low risks of inflation, and historically low valuations on small and mid-cap stocks, but highlighted fragile U.S. stock market fundamentals.
Acuff said he didn't think people should ''rush out and sell all of them (large-caps).''
''It's just that we have gotten to a level of expectations in the market that I think is going to be increasingly difficult to sustain.''
Using Coca-Cola Co (NYSE:KO - news) as an example, Acuff said: ''When I look at a stock like Coke selling at three times its growth rate, with virtually no growth at all, I marvel at the levitation that the stock has...I think the issue is, 'how much money are you going to make on Coke going forward?'''
From a historical perspective, U.S. equity strategist John Manley noted that ''as of a few days ago, approximately 76 percent of all common stock traded in the U.S. have now lagged the S&P 500 index by more than 15 percent. That's an utterly astounding number.''
From the start of this year, the S&P 500 (^SPX - news) is up 2.68 percent, closing on Tuesday at 1,262.14, off 34.87 points, or 2.69 percent.
The Dow industrials (^DJI - news) are up 5.35 percent, year-to-date. On Tuesday they fell 218 points or 2.21 percent to 9,671.
The market's advance has been narrowly focused on the large-cap stocks, leaving small-caps at historically low levels, with the Russell 2000 index (^RUT - news), a proxy for small-cap issues, down 9.15 percent year-to-date.
Salomon's emerging growth stock analyst, Keith Mullins, recently calculated that the small-cap sector was trading at a 21 percent discount on a price to earnings basis, when compared to stocks in the S&P 500 index, a measure of the 500 largest capitalised stocks.
''They have never been this low,'' said Keith Mullins, emerging growth stock analyst.
''I'd say buy the mutual funds and don't wait for this week's return, hold them for several years...This is free money because history always moves valuation averages back to their mean,'' he said.
''From a technical perspective, throughout this rally to new market highs, particularly the 10,000 level, the technical underlying credentials, or strength of the market has been waning...The equity market is looking fragile to us,'' said technical analyst, Louise Yamada.
Yamada said for nearly a year, the stock market has seen more declining issues on balance than advancing issues; more stocks hitting new lows rather than new highs; and more trading volume in the number of shares associated with declining stocks versus advancing stocks.
The strong U.S. economy has been the floor under which stocks have been able to rise, and according to Salomon's chief economist, that trend could continue through 1999.
''The most likely outcome is the U.S. economy remains strong this year, but the financial conditions will tighten enough to begin slowing more clearly in the year 2000,'' said Kim Schoenholtz.
''The exposure of the United States to capital market conditions, including the heavy dependence on foreign borrowing, (means) if the terms on which the U.S. has to borrow rise more substantially than we forecast (5.5 pct to 6 pct on the 30-year Treasury bond), it would be a threat to U.S. expansion.''
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