NEW YORK (CNN/Money) -
Investors may still be worried about scandals, persistent unemployment and the possibility that stock prices have sprinted ahead too fast. But the trend is clear: The economy is in recovery.
The latest sky-high GDP growth numbers are no accident, productivity gains are high and companies are reporting positive earnings surprises in overwhelming numbers.
The stock market should follow suit. In fact, after a recession and a stock market decline of at least 20 percent, stocks typically begin a cyclical bull market that lasts for three to six years, with the Dow rising 100 percent or more.
The next market advance is unlikely to match the stellar gains of the 1980s and 1990s, when blue chips rose more than 200 percent.
But so far, stocks are up only about 30 percent from their lows. So it's quite likely that top-quality shares can post additional gains of 50 to 100 percent over the next two or three years.
What should you own, if you want to ride the next market upswing?
I argue for picking the dominant companies in America's fastest-growing industries. It's always important to diversify as broadly as possible -- and that means including income investments and inflation hedges to reduce the risk and volatility of your portfolio, as well as some aggressive growth stocks if you want to pump up your potential return.
But your core holdings should be large, seasoned companies in sectors that are growing faster than the overall economy.
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I used to maintain a table of 100 blue-chip growth stocks on this Web site. And since we discontinued it, I've received many e-mails asking us to start it up again. We've revisited the list and trimmed it to 70 stocks.
The Sivy 70 will be featured in the December issue of Money magazine and will be posted on this Web site next week. To provide ongoing coverage of these stocks -- as well as to offer general market insights and other stock recommendations -- I am once again writing the Sivy on Stocks column for CNN/Money. It will be published every Tuesday and Thursday.
Here's a top stock in each of five key sectors: computers, software, pharmaceuticals, financial services and media. These 800-pound gorillas are:
Applied Materials is the top producer of chipmaking machinery and other capital equipment for the semiconductor industry. The company is highly cyclical and earnings become depressed when chipmakers' sales are bad and they postpone capital investment, as they did during the recession. But eventually, the semiconductor producers have to upgrade, and when they do, Applied Materials' profits can soar. In fact, they are projected to grow at a 20 percent compound annual rate over the next five years.
Microsoft remains the unstoppable giant of the PC software business. The company's franchise is so lucrative that it has no debt and has been able to amass a cash hoard of nearly $50 billion. That money is being used to acquire and develop other related businesses that extend Microsoft's reach (example: an enormous digitized photo archive). In addition, the company has begun paying a small dividend, which will be doubled next year.
Pfizer, which acquired Pharmacia this year, has further entrenched its position as the world's greatest drug powerhouse. Despite near-term charge-offs resulting from the merger, Pfizer will eventually have the opportunity for significant post-merger cost cutting. The combined company also has massive resources to support existing hot drugs -- such as Viagra, cholesterol-lowering Lipitor and antidepressant Zoloft -- as well as to develop new drugs. The stock is very attractively priced with a 13 percent projected annual growth rate and a P/E, based on 2004 estimates, of less than 16.
Citigroup is the largest and best-diversified financial services stock. Despite recent troubles, the company seems to be successfully navigating a crucial leadership transition, as CEO Sandy Weill, 70, hands off to his longtime associate Charles Prince, 53. The result will likely be a shift away from dealmaking and acquisitions to a greater focus on wringing profits from the house that Weill built. Count this stock as cheap, too: Its 12.6 forward P/E is actually below its total return potential, based on 12 percent projected earnings growth and a 2.9 percent yield.
Viacom looks like a timely play in entertainment, which remains one of the most important U.S. export industries. The diversified company operates a host of top brands, including MTV, VH1, Nickelodeon and Paramount. Viacom also controls Blockbuster Video, but has acknowledged it might sell its stake at the right price. Chairman Sumner Redstone controls the voting class A stock; the nonvoting B stock trades actively. Earnings are projected to grow at a 15 percent compound annual rate over the next five years.
Michael Sivy is an editor-at-large for Money magazine. Sign up for free e-mail delivery of Sivy on Stocks every Tuesday and Thursday.
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