Too Big to Grow; Why Wall Street has soured on many of corporate America's most admired and feared companies.

Byline: Karen Lowry Miller

The list of the American stock market's biggest losers reads like a roll call of its most famous corporate names. General Motors: down 63 percent in the last five years. General Electric: off 21 percent. Pfizer: minus 37 percent. Magellan recently became the latest big investment fund to cut its exposure to blue chips, including Microsoft, AT&T and Altria, in favor of emerging markets. It has come to this: Wall Street has more faith in Turkey than in General Electric.

On one level, this looks quite normal. Stock markets are cyclical, and the falling fortunes of so-called large-cap stocks, generally defined as companies with more than $10 billion in annual revenue, may mean only that they are now cheap enough to be poised for a big comeback. Indeed, some analysts are predicting that 2006 will be the year of the large cap, but these predictions are now almost as old as the five-year slump for such stocks, which persists despite strong growth in the U.S. economy. This is a bear market of unusual resilience, and dissonance, for it is depressing the value of the most admired (GE) and feared (Wal-Mart) corporations in America. Andrew Clark, senior research analyst for mutual-fund tracker Lipper, says that "large caps are still in the recovery phase of the bear market," which typically would have given way to a growth phase two to three years ago.

In part, this is a hangover story. People tend to forget that in the late tech bubble, it was large caps (not start-ups) that soared highest, and fell hardest when the collapse came in 2000. They have wobbled ever since. Large caps have lately been growing at about 2 percent a year, five times slower than small caps, and have yet to recover their pre-bubble values. If you had put $10,000 into large-cap growth funds at the end of 1999, you would now have a mere $7,388.15, according to Lipper. By contrast, small- and mid-cap funds recovered by 2001-02.

The market's wariness comes despite a run of record earnings for companies like GE. Joseph Milano, portfolio manager for the New America Growth fund at T. Rowe Price, says investors need to see a break in the cycle of bad news for the world economy to regain faith in global giants, whose size and reach expose them to uncertainty wherever it may arise. There was a major destabilizing event in each year starting with 2001, notes Milano: 9/11, recession, a war, interest-rate hikes by the Fed and an oil-price spike. Meanwhile, other analysts say, the slow recovery of Europe and Japan relative to the United States has weighed more heavily on big multinationals than on small companies focused on the American market.

Yet despite fresh signs of a widening global recovery in recent weeks, individual investors are still pulling money out of large-cap funds in favor of global stocks. In the worst case, investors have become so disillusioned by the performance of some once gilded names that credit insurance against default by the likes of General Motors on its corporate bonds costs nine times as much as default insurance for Mexican government debt.

To glimpse the depth of the market's skepticism, take a look at the Home Depot. Five years ago, the firm had a whopping price-to-earnings ratio of 40 and could do no wrong. Now it is a classic example of a giant that gets no respect. The do-it-yourself retailer has increased earnings every year since then, yet its P/E ratio is now just 13. It recently beat earnings forecasts, and posted healthy growth in same-store sales. --Logically, the share price should have jumped. Yet the outlook on large caps is so weak, it rose one cent.