(MONEY Magazine) – The economy seems to be chugging back onto the right track, and Wall Street wisdom (no jokes, please) has stocks rising this year after two consecutive annual declines. But before you jump for joy, we have one word of caution for you: valuations.

While stocks usually deserve higher multiples in low-inflation times like today, and the market typically rebounds the first year out of a recession as profits improve, the average company in Standard & Poor's 500-stock index still trades at 22 times this year's estimated earnings, despite long-term annual growth prospects of 8%. The top 50 stocks by market value seem even pricier, with an average price/earnings ratio of 27.

While the biggest companies have the biggest advantages--clout, for instance, plus potentially huge cost-cutting efficiencies--these businesses also face the hard fact that it's tougher to grow from a large base (see the chart on the facing page for basic information on all 50).

Analysts can debate the merits of megacaps, but for most investors this misses the point, because the fact is that the bulk of our money is in the largest companies, and we're not about to shift it elsewhere. The top 50 stocks, with a combined market value of $5.6 trillion, accounted for 55% of the S&P 500's total market capitalization on April 22. Simply put, the blue chips matter. The key challenge for any of us is finding the right opportunities.

That's where this part of our "Invest to Win" package comes in. As Oakmark fund manager Bill Nygren puts it: "There are attractive small-cap, midcap and large-cap names. It's a stock picker's market." Here we present our nominees for the best choices among large-caps--along with our cautionary conclusions on those most likely to disappoint. (Turn to page 92 for some special opportunities among smaller companies.) After analyzing sales, earnings growth and other key data--as well as speaking with some of the smartest investors we know--we've placed more than a dozen stocks into three broad camps: priced to move, priced to match the market and priced to lag. Even if we haven't focused on the blue chips you own, our assessment of these well-known names should prove instructive.

The stocks we call movers offer potential returns in excess of 10% annually over the next two years. The laggards seem unlikely to gain even 5% a year in that period. Those in the middle--market performers, in the lingo of Wall Street--should plug away, in line with a stock market that, according to many of the pros we spoke with, should gain a respectable 8% to 9% annually over the next 24 months. While we see no reason to sell this last group, we wouldn't load up on them right now either.

Priced to move

While the megacaps as a group seem expensive, we believe these five stocks could outrun the market in the next two years. Some are turnaround plays, others fallen growth stocks now available on the cheap; still others are major forces in industries with the wind at their backs. Each has the potential to return at least 20% by mid-2004.

AOL TIME WARNER Since May of last year, AOL has been in free fall, losing two-thirds of its value. You might think consumers had turned off AOL Time Warner's Internet service, tossed all of its magazines (including MONEY) and run from theaters when its films played. In fact, the world's largest media company did okay for a recession year; revenue rose 6% to $38 billion, while earnings before interest, taxes, depreciation and amortization (EBITDA, a key measure for media stocks) grew 18% to $9.9 billion. The real problem: AOL Time Warner had led Wall Street to expect so much more--growth in revenue of up to 15% and EBITDA gains of up to 30%. Investors have been so put off by the hype that the company is now selling for less than the sum of its parts. Goldman Sachs figures that the various units, valued individually, are worth $32 altogether, based on projected 2003 EBITDA. In other words, AOL Time Warner's stock trades at a 38% discount to its underlying value. While we don't expect this stock to rescale its highs anytime soon, even a modest spike would bring impressive rewards.

DUPONT Other than a brief moment of sexiness as a "life science" concept stock in the late 1990s, DuPont has been a dog for years: At a recent $46.35, it's a tad below where it was in 1997. Since that time, the chemical maker has seen sales shrink 36% and operating earnings fall 61%. But the new, slimmed-down DuPont is worth a look. Chief executive Charles Holliday Jr., a career DuPonter, has cut costs (laying off 4,000 of 93,000 people, for instance) and sold extraneous units to help reduce DuPont's debt-to-equity ratio to 18% from 42% six months ago. And Holliday's vision gets more interesting: He wants to focus on the faster-growing specialty chemical units (agriculture, biology, electronics) while dumping the slow growers (polyester, nylon). The stock is up 9% this year, but Susan Byrne, portfolio manager of Gabelli Westwood Equity, thinks the market's just catching on. Her call: shares of DuPont could hit $90 in three years--almost double the current price.

GENERAL ELECTRIC GE usually commands a premium to the market, yet investors now have a chance to buy it at a discount. The stock, down 45% since August 2000, trades for 20 times this year's estimated earnings vs. the S&P 500's 22 times. We think investors have overreacted in the wake of Wall Street's accounting scandals. No question: General Electric under new CEO Jeffrey Immelt has shown that it too has flaws. On April 11, in its first-ever conference call with investors (yep, first ever!), the company reported almost no revenue growth for the first quarter. With its major industrial businesses under pressure and the so-called short-cycle ones (like NBC) not yet kicking in, Wall Street had to wonder: What on earth will fuel GE's hoped-for double-digit profit growth? The answer still isn't clear, but Prudential Securities analyst Nicholas Heymann argues that growth will return faster than skeptics think, especially in the power-systems and medical-systems units. Analysts now peg General Electric's long-term growth prospects at about 15% a year. That's still nearly twice the S&P's projected growth. Heymann is almost gleeful at the opportunity. "It's been a long time," he says, "since the value guys wanted to talk about GE."

J.P. MORGAN CHASE This bank's role as one of Enron's top enablers--including its part in the energy trader's now-known off-balance-sheet shenanigans--certainly hasn't helped J.P. Morgan Chase's image as it struggles through one of the driest capital-markets environments in recent history. Since our January issue, when we made the stock one of our best investments for 2002, shares are down 4% to $36.60. But we're standing by this pick. It's now 30% off its 52-week high and trading at 13.5 times this year's estimated earnings vs. 15 times for its bank peers. Better yet, J.P. Morgan Chase, the second-largest diversified financial firm in the country and among the strongest in investment banking, should benefit tremendously as the U.S. economy rebounds. Wall Street forecasts profit growth of 65% this year (albeit from a low base) and 25% next. Here's how John Snyder, manager of John Hancock Sovereign Investors, looks at it: "Are earnings still under pressure? Yes. Will there still be issues? Yes. Short term, Citigroup or Bank of America will do better. But if you believe things will pick up later this year, J.P. Morgan has a ton of upside."

PHILIP MORRIS Whatever your views on smoking, Philip Morris stock sure looks tempting: Its valuation (11 times estimated 2002 earnings) is just half that of the S&P's, while its growth rate (21% this year) is almost double. "Philip Morris is far and away our favorite stock in the top 30," says Brett Gallagher, manager of Julius Baer Large Cap U.S. Equities. At $53.97, it's also a backdoor way to get shares of Kraft, the biggest and most profitable food company. Though Kraft, partially spun off from Philip Morris last June, is also a Big 50 stock, we think Philip Morris (which still owns 84% of the food giant) is the savvier play, because Kraft, at 19 times projected earnings, is more expensive. The obvious risk from tobacco litigation has long been priced into Philip Morris (or, ahem, Altria, as it now wants to be known), and the fat dividend--at 4.3%, one of the highest in the S&P--eases the pain of waiting while the company slogs through its many court battles.

Priced to match

These stocks should fare reasonably well as the economy recovers and investors start looking for value in the hardest-hit sectors, like tech and telecom. While we doubt any will post the kind of returns you'll want to brag about at a cocktail party, they're likely to chalk up annual increases in the high single digits for the next two years. If you own them, hold them. If not, watch for price drops that create buying opportunities.

DELL It's the nicest house in a bad neighborhood. PC making may be a cutthroat commodity business, but no one does it better than Dell. By building only what customers order, Dell avoids the headaches of inventory--and takes in cash up front. During the downturn, Dell put the squeeze on its less efficient rivals like Gateway, Compaq and Hewlett-Packard with aggressive price cuts, yet still managed to both make a profit and take market share. To further pump up sales (and margins), Dell has been moving upmarket into the higher-end server and storage businesses. But let's be realistic here: Dell remains dependent on desktop computers for about half its sales, and while the current PC slump won't last forever, the growth prospects for PCs just aren't worth getting all that excited about yet. Dell trades for around 37 times its estimated 2002 earnings and 31 times its 2003 projections despite an expected long-term growth rate of 15%.

IBM The bellwether technology stock recently saw its shares dumped en masse as accounting questions and disappointing first-quarter numbers (earnings dropped 32%, while sales fell 12%) worked their black magic on Wall Street. IBM fell as low as $83 in mid-April, down some 30% from its January high. We think investors are getting too squeamish about how the sausage is made. Of course it will be very difficult for IBM's new chief executive, Sam Palmisano, to push this behemoth's revenue growth into the high single digits. But there are real bright spots at the company going forward--in the higher-margin services business, for example. And IBM is gaining market share in storage, servers and software. Bill Dwyer, chief investment officer at M&T Investment Group, calls IBM "intriguing" below $88 a share. That's where it was on April 22, trading at $87.93, or roughly 21 times estimated 2002 earnings--just about on par with the broader market.

JOHNSON & JOHNSON Since we dubbed J&J "the ultimate buy-and-hold stock" in our August 2001 issue, shares have risen 20% to a recent $63.34, while drug stocks as a group have fallen 6% amid concerns that generic pills and potions will eat into all those patent-pumped profits. Investors saw safety in J&J's diversity: Its businesses include Band-Aid bandages and other consumer products, in addition to the medical equipment and pharmaceuticals that had been drawing growth investors. We still love J&J (its pharmaceutical division is growing as fast as Pfizer's, the industry standard), but at 28 times estimated 2002 earnings, it is selling at a 27% premium to the S&P 500. "I'm comfortable holding the stock at these levels," says Julius Baer's Gallagher, "but investors might have a chance to buy if it dipped into the high $50s."

3M With everything from those little yellow Post-It notes to a polymer film for windshields, 3M has always had a fine reputation for industrial research. Unfortunately, the company was woefully mismanaged: Despite a decade of technological advances, operating margins barely budged from 1990 to 2000. Enter James McNerney, former head of General Electric's aircraft-engines group, who has brought a little bit of GE to 3M since he was named CEO in December 2000. McNerney has cut costs (including 5,000 of 75,000 jobs) and introduced GE's fabled quality-control and productivity program to drive returns. The company is expected to see $850 million in savings this year that will add $615 million (or $1.60 a share) to the bottom line. "When you increase the efficiency, you end up generating a lot more cash flow," notes Lewis Johnson, an analyst at T. Rowe Price, which owns 2 million shares.

Already, investors have heralded the new 3M, driving the stock up 25% since word of McNerney's appointment, to a recent $125. But at 25.5 times projected 2002 earnings--higher even than GE's--3M's valuation can be tough to swallow. Our view: If the stock slips, investors who buy on those dips may be handsomely rewarded as the company comes into its own.

WAL-MART The world's biggest store continues to mow down competitors. We've written before about its ability to muscle suppliers, its steamrolling of the supermarket chains (Wal-Mart long ago surpassed Kroger as the country's No. 1 grocer), its technological prowess and its aggressive rollout of private-label products (Wal-Mart, for example, snagged the White Cloud brand, once owned by its leading supplier, Procter & Gamble, and now pushes this in-house label's goods on the cheap). Comparable-store sales rose 6% last year, despite the recession. Sales-per-square-foot surpassed $400 vs. the Target chain's $274 and Sears' $319. Analysts at Morgan Stanley think Wal-Mart's sales this year will rise 13% to $247 billion and profits will grow 17% to $7.9 billion. Our caveat, as always, is not the company but the price. At a recent $57.55, Wal-Mart trades at 33 times this year's expected earnings. While off from its giddy highs of a few years ago, the stock still looks pricey, given that the company's long-term growth prospects are in the teens. Then again, when Wal-Mart surprises us, it almost always does so on the upside.

Priced to lag

Given the risks ahead for these giants--including rising competition and slowing core businesses--they just look too expensive. As the market picks up, we're betting that all four will underperform. One or two of them may even fall sharply. Watch out.

AMGEN Piggybacking on the success of two drugs--Epogen (which boosts red blood cells in dialysis patients) and Neupogen (which enhances white blood cells)--Amgen turned itself into a $60 billion machine. Yet Amgen trades as if it were still a fledgling biotech. The stock goes for 14.6 times sales, a third higher than any other company in the top 50. While Amgen is awesomely profitable--operating margins are 40%--it must ramp up revenue, and fast, to support such a high price. Amgen hopes that its $16 billion purchase of Immunex, maker of rheumatoid arthritis drug Enbrel, will do just that. Enbrel instantly adds nearly $1 billion to the top line, and by expanding Enbrel's treatment from arthritis to psoriasis (which affects more people), Amgen thinks it can triple revenue by 2005. But the big pharmas and smaller biotechs will put up a fight. Our call: While Amgen's product line looks solid, competition will take a bite out of its growth rate and force investors to give the stock a more realistic valuation.

CISCO Cisco grew fat and happy during the great Internet build-out: It sold its routers and other networking gear to emerging telecom carriers and Baby Bells alike. No more. Many of Cisco's old customers have gone bankrupt, and still-standing buyers like Qwest and WorldCom keep slashing budgets. Market researcher RHK figures that telecom spending could drop as much as 35% this year. "The high-growth segments that Cisco had been targeting have cratered," says Scott Cleland, chief executive of Precursor Group, an independent research firm.

With both its telecom and corporate customers sitting on their wallets, Cisco has great hopes that it can find potentially explosive growth in promising, if problematic, new markets like wireless networking, storage networking and voice-over-IP telephony (a cheap if not wholly reliable way to carry voice traffic over the Internet). Some of these areas are simply unproved; others are already highly competitive.

Then there is Cisco's, uh, aggressive accounting. In April 2001, Cisco wrote down more than $2 billion in worthless inventory, but the company's critics say it should have booked this "one-time charge" as simply a cost of doing business, as rivals Nortel and Lucent do. Cisco says its accounting is "conservative." Still, at 46 times estimated profits (for a fiscal year that ends in July) and six times sales, Cisco looks pricey for a technology company whose best days may well be behind it.

WALT DISNEY Investors love Disney. It's been one of the strongest-performing media stocks, shooting up 44% since its September lows. But you gotta wonder what people see in a company whose operating income fell nearly 40% in the fourth quarter and performed almost as badly in the first quarter this year. All media companies were hit by the recession and the Sept. 11 terrorist attacks on New York City and Washington, D.C., but the effects have been particularly deep and lingering at Disney. Attendance at its theme parks (which make up nearly 40% of cash flow) remains depressed, and there are plenty of other problems of Disney's own making. Its purchase of ABC six years ago has been a flop: ABC has slipped from first to third among the networks, while its prime-time audience declined sharply this season. Even the future of ESPN, one of the most profitable cable networks, looks clouded because of skyrocketing sports-rights fees. (Morgan Stanley calculates that ABC and ESPN could lose $2.2 billion on a six-year, $4.6 billion contract they signed with the NBA in January.) Skeptics question whether CEO Michael Eisner has any vision to make this company--a hodgepodge of theme parks, film studios, TV and cable networks and consumer-products divisions--work as a coherent whole. If Disney shares were cheap, we might be willing to overlook the problems. But they're not. At $24.64, they trade at 14 times this year's forecast EBITDA, a premium to diversified media conglomerates like AOL, Vivendi and News Corp.

INTEL The chip industry shrank more than 30% last year, yet Intel remained profitable while other chipmakers slid into the red. And it did so while spending a staggering $11 billion on research and capital improvements--necessary down payments on the future. But Intel is stuck between a rock and a hard place: Its core PC business is slowing and the new markets it needs to spur future growth, like communications and networking, are slumping.

And rival Advanced Micro Devices is nipping at Intel's heels. While Intel's aggressive price cuts helped to push AMD into the red last year, AMD has proved a tenacious competitor. Last year AMD's cheap, speedy Athlon chips enabled it to take share from Intel. Though Intel has since regained its speed lead with its 2.2 gigahertz Pentium 4, AMD is readying yet another would-be Pentium slayer.

Given Intel's expected long-term growth rate of 19%, shares look plenty rich enough, going for 43 times 2002 earnings and 7.6 times sales. It's not the only overpriced chipmaker: Texas Instruments trades for 105 times earnings and 7.5 times sales, despite growth prospects only marginally better. But that's not a reason to buy Intel--just a sign to steer clear of TI as well.