BALTIMORE (Stockpickr) --“Sell in May and go away” -- so suggests an old market adage based on the market’s historic tendency to slump in the summer months and remain rough and tumble until the beginning of October. But with the first trading day of May upon us, should you heed the old timers’ warning? Or is it better to be a buyer in the market this month?
I’m betting alongside the latter.
That’s because technically and economically, investors are getting hammered with bullish signals right now. From measures of economic growth and solid earnings to a conspicuous breakout in the S&P 500 last week, the most important market indicators are all pointing toward higher levels this month. This week, we’ll attempt to benefit from a higher push in stocks by looking at a new set of Rocket Stock plays for May.
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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 quantitative screen that seeks out stocks with a combination of analyst upgrades and positive earnings surprises.
It’s a strategy that’s worked well for us -- in the last 101 weeks, Rocket Stocks have outperformed the S&P 500 by a very material 76.52%.
Without further ado, here's a look at this week's potential plays.
Praxair
First up this week is Praxair (PX), an industrial gas supplier that generated more than $10 billion in sales last year. Praxair is already seeing a double-digit year in 2011 -- shares of the firm have rallied more than 11% this year, and analyst sentiment suggests that that shareholders could see further gains in 2011.
Praxair is one of the giants in the industrial gas industry, serving clients in a wide bevy of businesses, from manufacturing and health care to mining and refining. While the industry was incredibly fragmented just a couple of decades ago, a series of acquisition sprees from Praxair and its peers have trimmed the field down to four like-sized rivals. Of the group, Praxair is the most attractive stock -- albeit not by too wide of a margin.
For Praxair to continue to compete with its peers, the company will need to keep its focus on acquiring new clients (switching costs are high in the industry due to very long-term contracts) and expanding its array of offerings. Strong earnings last week should be a good catalyst to start the month.
MetroPCS
The cellular carrier business is highly competitive, continually shrinks through consolidations and requires extremely high-capital investments. Generally speaking, unless you’re looking at investing in a major name such as AT&T (T) or Verizon (VZ), the challenges of doing business are incredibly high. Against all odds, MetroPCS (PCS) has managed to carve out an attractive, if shallow, niche -- and consumers have been taking notice.
MetroPCS is a cellular carrier that provides unlimited, fixed-price mobile phone services to 8.2 million customers. By honing in on consumers who are after a strong value proposition, MetroPCS has been able to dramatically increase its size, particularly given the trading down that consumers enacted in the height of the recession. Because cellular service has largely become a commodity product, the company is able to compete based on price alone, something that simply wasn’t possible years ago when disparities between different carriers’ quality were more noticeable.
Because the company’s geographic footprint covers a population of nearly 150 million, the company has considerable room for expansion, especially as larger competitors remain distracted by one another. Right now, I think that the quickest road to gains comes from an acquisition bid. With a high volume of corporate actions in the industry right now, cash-flush carriers might consider turning to PCS to grow their budget-conscious base.
Viacom
With TV networks MTV, Nickelodeon and Comedy Central and a major film studio under its marquee, Viacom (VIA, VIA.B) is host to a valuable vault of content and the channels needed to distribute it. The company lays claim to some of the most attractive television franchises out there today -- brands that cater to elusive, lucrative audiences and have major revenue generation potential off-screen as well.
Not surprisingly, owning a handful of successful pioneering channels comes with significant, well-capitalized competition and the risks of ever-changing consumer programming tastes. Even so, the company’s cash-generation abilities should remain well in excess of its modest dividend payout.
With analysts taking note of this stock, we’d do well to follow the money and do the same.
Dollar General
Dollar General (DG) is the largest deep discount retailer in the U.S., with a store count of 9,300. That large footprint might be particularly important right now as cost-conscious consumers begin to flock to cheaper alternatives in an inflationary environment.
As the recession deepened between late 2007 and 2008, Dollar General actually enjoyed impressive growth as consumers on the lower end of the income spectrum were forced to trade down from conventional retail options. Much of that growth has proven sticky, as shoppers opt to stretch their dollars further (for the same items in many cases). Now, though, a rising tide of inflation could send a second wave of shoppers through Dollar General’s doors.
I’ve been a fan of this company for a while now, and even though it doesn’t benefit from the deep-discount status that it boasted when I was talking about it in 2008, it’s still got plenty of upside potential right now. Dollar General’s size and impressive distribution network give it margins that outpace many conventional peers through sheer volume. At the same time, the company’s new point-of-sale systems are deployed nationwide, giving consumers even more payment options when they shop at a DG location.
Even though Dollar General’s debt load is high, it’s still very manageable right now. Investors who opt to take a longer-term position in this stock should still watch for the potential margin squeeze that could come with inflation.
MeadWestvaco
Packaging manufacturer MeadWestvaco (MWV) has already had an impressive run in 2011 -- shares are up nearly 29% year-to-date. But that impressive performance has only brought the firm to the forefront of analysts’ attention. Because MWV supplies packaging for consumer goods (primarily domestic consumer goods), the company traditionally leads the economy. Not surprisingly, that’s meant solid performance for shares of late.
With consumer sentiment rising and an impressive balance sheet, this company has significant tailwinds in its favor. That said, this stock will be a good one to watch for early signs of trouble going forward.
To see this week’s sentiment plays in action, check out the Rocket Stocks portfolio at Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
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>>5 Stocks Setting Up to Break Out
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At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.
