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The Sivy 70 is a list of key companies suitable for conservative long-term growth investors. I review the list periodically to make sure that the stocks' long-term prospects still meet the criteria for inclusion.
This time, I've decided to change two of them. Burlington Northern Santa Fe is replacing Union Pacific, and Tyco International is being added in place of Baxter International.
In fact, neither Union Pacific (Research) nor Baxter International (Research) is a terrible stock. But though some analysts still like both as comeback stories, the two companies no longer appear capable of meeting my long-term growth targets.
In light of these changes, it's worth reviewing the purpose of the Sivy 70.
Basically, it is a list of stocks you should use to build the core of your long-term growth portfolio.
In fact, there is a surprisingly small group of stocks that qualify as leaders in their industries and are also financially strong and likely to provide individual investors with an average annual return of 11.5 percent or more over the next five years. Such stocks typically have projected annual earnings growth of at least 8 percent and many also have meaningful dividend yields.
To assemble Sivy 70, we screen the total stock universe for companies with annual sales and market caps of at least $4 billion. Then we further narrow the list with tests for financial strength and growth potential that reduce the number of stocks to fewer than 200. After eliminating stocks that duplicate larger companies and throwing out some that get particularly bad ratings from analysts, we end up with around 70 stocks.
Of course, there are companies that are interesting as short-term turnarounds or special situations that are not among the Sivy 70. And the shares of some fundamentally attractive companies that are included may not be attractively priced at any given moment. But long-term growth investing is most successful if you identify industry leaders with superior growth prospects and then follow them until you get a chance to buy at an attractive price.
The new members
Our two current swaps underperforming companies with stocks that have much better profiles. Union Pacific is the largest North American railroad. But ever since the company's 1996 acquisition of Southern Pacific, the combined railroad has had difficulty managing its traffic, especially as demand has picked up. Over the past two years, Union Pacific has had to scramble to add engineers and locomotives.
Burlington Northern (Research) also stands to benefit from an improving outlook for railroads. Even more important, the company has a much more impressive record over the past 12 to 18 months than Union Pacific does. Moreover, Burlington Northern has better prospects: Projected annual growth over the next five years is 12.5 percent vs. 10 percent for UP. Burlington also trades at lower price/earnings ratios based on both current earnings and 2006 projections. Based on 2006 results, Burlington's P/E at $55 a share is just over 14.
Baxter International has an interesting portfolio of medical businesses, including intravenous specialty products, biopharmaceuticals, systems for blood collection and transfusion and treatments for kidney disease. But earnings are rising at only a high single digit rate and are projected to continue at around 10 percent annually over the next five years.
Tyco (Research), which will replace Baxter, is an industrial conglomerate that has been in the news a lot over the past couple of years, thanks to the messy trial of former top executives. The current CEO, however, is given great credit for cleaning up the company, and results have rebounded strongly. The turnaround play in Tyco is probably over, but from here earnings are projected to grow at a compound annual rate of 15 percent over the next five years. The shares also yield 1.1 percent. At $34.69, 17.6 times earnings for the current year and 15.1 times next year's projected results, Tyco looks like a very attractive choice for long-term total return.
See the Sivy 70.
Michael Sivy is an editor-at-large for MONEY magazine. Click here to receive Sivy on Stocks via e-mail every Monday.