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BALTIMORE (Stockpickr) -- Don’t let the S&P 500’s innocuous 0.54% bump last week fool you -- it was a very big week for the big index. The S&P 500 plowed through to new all-time highs on Thursday, and it was no early April Fool’s joke.
New highs may sound like an irrelevant market statistic, but in fact they’re an important part of a positive feedback loop that helps to keep the market splashing up against new, higher high water marks. With everyone who’s “in the market” effectively sitting on gains this morning (barring the occasional bad investment), the psychological drag of a “back to even” mentality isn’t standing there to stifle stock prices.
Looking back over the last century, new highs weren’t exactly the rare phenomenon that they may sound like. In fact, over the past five decades, market averages made new highs almost every month – it’s a natural part of a bull market. I think we’re in store for some higher highs yet to come in 2013.
That’s reason enough to take a closer look at five new Rocket Stock names this week.
For the uninitiated, “Rocket Stocks” are our list of companies with short-term gain catalysts and longer-term growth potential. To find them, I run a weekly quantitative screen that seeks out stocks with a combination of analyst upgrades and positive earnings surprises to identify rising analyst expectations, a bullish signal for stocks in any market. After all, where analysts’ expectations are increasing, institutional cash often follows. In the last 193 weeks, our weekly list of five plays has outperformed the S&P 500 by 73.3%.
Without further ado, here’s a look at this week’s Rocket Stocks.
IT behemoth IBM (IBM) is having a good year in 2013. Shares of “Big Blue” have climbed more than 11.3% since the first trading day in January, even besting the impressive performance of the S&P over the same period. IBM builds mainframes, designs software and provides IT services to corporate clients across more than 170 countries.
IBM led the charge for PC makers to switch their focus to enterprise IT back in 2005, selling off its consumer PC business to Lenovo and replacing it with a lucrative set of efforts that includes services that earn mammoth operating profits. Since then, almost every major PC-maker has followed suit, de-emphasizing their increasingly commoditized computer operations in favor of the growth potential of enterprise IT. By becoming a go-to resource for clients, IBM ensures a sticky, (largely recurring) revenue stream. That’s enviable positioning, especially given that other computer makers are scrambling to play catch up eight years later.
Financially, IBM is a high performer. The firm earns double-digit net profit margins for its efforts, and it's used that cash to generate one of the heftiest shareholder yields in the tech sector. Last year, IBM returns more than $16 billion to investors in the form of dividends and share buybacks. This week, we’re betting on shares of this Rocket Stock name.
Wells Fargo (WFC) has earned a reputation as the best of the big banks, and for good reason. The banking giant was one of the few major financial institutions that didn’t actually need a TARP injection to stay afloat during the financial crisis thanks to a focus on retail and commercial banking that most peers didn’t have, and it’s remained one of the most financially-attractive of the gargantuan banks.
Wells sports more than $1 trillion in assets thanks to the purchases it made back in 2008, snapping up beleaguered Wachovia at fire sale prices, and establishing a meaningful presence on the East Cost as a result. Like other banks, Wells has a big headwind in the form of the extremely low interest rates that have prevailed in this environment. As the rates start to perk up again on the heels of an economic recovery, so too should WFC’s profitability.
A stellar reputation among consumers and businesses means that Wells Fargo lays claim to some supremely cheap sources of capital -- a big, fat deposit base. That helps to keep WFC’s earnings along the lines of the most lucrative regional banks even while rates stay low. While the firm’s balance sheet likely contains more than a few scary corners, WFC’s financial health is best-in-breed.
Entertainment company Time Warner (TWX) is having an amazing 2013. Shares of the $53 billion firm have jumped by more than 20% since the start of this year, doubling the broad market’s performance over the same period. The firm’s success shouldn’t come as a huge surprise, though. With television networks such as HBO, CNN and TNT under its belt -- as well as the largest film studio in the world between Warner Bros. and New Line Cinema -- TWX has plenty of intellectual property to leverage on its balance sheet.
Recently, TWX has been shedding the pile of unrelated businesses it took on over the past few decades, and focusing on its core entertainment operations. In splitting off its cable utility, troubled AOL (AOL) unit, and now its magazines, the firm generated cash while concentrating its revenue mix on the most attractive component of the business.
As new technologies like streaming video gain popularity, they could represent increasingly important revenue streams for content owners like TWX. And as Time Warner’s balance sheet continues to balloon in value, shareholders should see performance metrics climb in kind -- especially with laggard units shed from the firm. We’re betting on shares this week.
If you’ve ever eaten at a restaurant or stayed at a hotel, you’ve probably come in contact with Ecolab’s (ECL) products -- you probably just didn’t realize it. Ecolab is one of the biggest names in the cleaning and sanitation business, serving the needs of the institutional and commercial maintenance departments across the globe. When hotels, restaurants, and dozens of other kinds of businesses want to keep clean, Ecolab is often the first name that comes to mind.
And dominance is sticky in the sanitation market. Because businesses stake their reputations on cleanliness they’re less likely to switch to unfamiliar rivals, especially because of the relatively trivial costs of Ecolab’s offerings and the dispensing hardware that many facilities already have installed. The firm owes a lot of its success to a highly-motivated sales force; because commissions are a big chunk of sales compensation, costs can scale up or down according to the firm’s revenue generation.
Ecolab ramped up its debt load when it acquired Nalco in 2011 to ramp up its exposure to the water treatment business. Even so, the firm is still in decent financial shape with plenty of liquidity available in the form of a $1.1 billion cash position and more than that available in open credit facilities. We’re betting on shares of this Rocket Stock this week.
It’s been easy to forget about Yahoo!’s (YHOO) attractive attributes over the last few years. In spite of the public screw-ups this firm has engaged in, Yahoo! remains one of the most popular destinations on the Internet, and it still owns a successful collection of web services. Yahoo! is loaded too. After selling off a chunk of its Alibaba ownership, the firm carries $4.2 billion in cash and another $5.5 billion in long-term investments. For those keeping track, that cash and investment position makes up close to 40% of YHOO’s market capitalization.
In other words, the stakes are a whole lot lower than they appear for Yahoo!’s new management team -- if it can avoid screwing up and spending all of that cash. While too many investors worry about whether or not Yahoo! can turn around its business, they should really be worried about whether Yahoo can maintain its huge traffic stats and carve out a more identifiable niche for itself. Getting rid of superfluous business units is a good start -- cutting costs only serves to magnify the operating metrics that YHOO already offers investors.
If Yahoo! can manage to keep acquisitions small and work out a niche visitor, it could surprise investors in the near-term. In the meantime, management needs to start turning that huge warchest into shareholder yield through buybacks and a dividend payout.
To see all of this week’s Rocket Stocks in action, check out the Rocket Stocks portfolio at Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.