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5 Rocket Stocks to Buy for 2012 - views
BALTIMORE (Stockpickr) -- As investors watch the tape on the first trading day of 2012, don’t think that the lessons of 2011 are going to be forgotten just yet.
After all of the volatility that swung the market from gains to losses in 2011, the S&P 500 index closed flat for the year, making a non-interest-bearing checking account a better risk-adjusted investment than stocks for the last 12 months. In the real world, market performance over the course of a calendar year is a fairly arbitrary measure -- but for investment managers, who live and die by their annualized performance, returns from the first trading day of January to the last trading day of December are crucial.
Not all stocks were created equal last year -- the 30 blue-chips that comprised the Dow, for instance, rallied more than 5.5% on average in 2011. At the same time, the Nasdaq Composite closed the calendar down 1.8%. And investors’ flight to quality is definitely still factoring into returns.
This week, we’ll aim to take advantage of those broad market tailwinds by looking at a new set of Rocket Stocks.
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 134 weeks, our weekly list of five plays has outperformed the S&P 500 by 82.62%. With that, here’s a look at this week’s Rocket Stocks.
Starwood Hotels & Resorts Worldwide
As the world’s largest operator of luxury hotels, Starwood Hotels & Resorts Worldwide (HOT) has seen its share of headwinds in the past 12 months. All told, shares slid more than 21% in 2011, driven lower by continued soft travel spending. Even Starwood has been challenged of late, this firm is still has significant upside for the year ahead.
That’s because Starwood’s portfolio positioning is particularly attractive. Hotels are a high barrier to entry business: They’re capital intensive to build and operate, and rewards programs and corporate contracts tend to generate high consumer stickiness. Because Starwoods brands, including Le Meridien, St. Regis and W, are all built off of the same rewards program, customers looking for more selection among luxury and upscale hotels are more likely to select Starwood for their travels.
As a result, the firm is primed to bounce back hard when travel spending gets legs again. Already, that prowess has been reflected in Starwood’s upwards earnings trajectory in the last several quarters. The fact that the vast majority of properties are franchised helps take some of the strain and market risk off of HOT’s balance sheet.
Starwood shows up on a recent list of 7 Stocks JPMorgan Thinks You Should Buy.
Laboratory Corporation of America
Laboratory Corporation of America (LH), or LabCorp, is one of the largest independent medical lab operators in the U.S., with more than 1,700 patient service centers that provide everything from run-of-the-mill blood tests to more specialized genoic and oncology testing.
With analyst sentiment rising in shares of this $8.5 billion firm, it makes sense for investors to give LabCorp a closer look in 2012.
In a business where size matters, LabCorp’s scale is a serious advantage – one that provides shareholders with some semblance of an economic moat in an otherwise commoditized business. By and large, patients don’t care where they get their medical tests done; as long as the lab is covered by their insurance, location is the deciding factor. As a result, LabCorp’s hard-to-replicate network makes this business look significantly less attractive to new potential rivals.
That being said, the massive power wielded by insurance companies is a major concern for firms like LabCorp. Insurers negotiate pricing for lab tests across their networks, giving them pricing power over LH.
At the same time, though, LabCorp’s push toward more advanced, proprietary tests gives the firm much less exposure to low-margin work and limits the risks of unfavorable insurance company negotiations.
One big bet on LabCorp comes from Larry Robbins' Glenview Capital Management; as of the most recently reported quarter, the stock comprised 1.1% of the total portfolio.
As workers start waiting for their W-2s, Intuit (INTU) is waiting for its opportunity to start collecting cash. Intuit is the standard bearer in the tax-prep software business with its TurboTax franchise, in addition to its successful accounting and personal finance software titles.
In the last several years, Intuit has carved out the No. 1 role in the tax software duopoly that it shares with H&R Block (HRB), a position that’s been bolstered by tight integration between the firms accounting and finance titles and its TurboTax software. Integration has been a key element of Intuit’s growth strategy; by offering complementary services such as payroll management, payment processing, and lending, the company is able to leverage its existing Rolodex to expand its bottom line.
Intuit isn’t without risks. Competition is fierce in the tax prep software space, and all it would take is a major flub (in the form of a security breach or tax return mistakes) for Intuit to cede market share to one of its rivals.
Still, investors should like the fact that the company is still generating increasing returns -- after all, analysts are already paying attention to Intuit this year.
For another take on Intuit, the stock appears on a recent list of 6 Tech Stocks to Avoid in 2012.
Activision Blizzard (ATVI) focuses on a different type of software. This $14 billion video game maker lays claim to mammoth game franchises such as Call of Duty and World of Warcraft, developing titles that can consistently attract a large amount of spending from casual and serious gamers alike.
A perfect example: The firms’ newest title, Call of Duty: Modern Warfare 3 broke records when it was released in November by selling more than $1 billion in the first couple of weeks the game was on sale.
Because Activision owns successful gaming franchises, it benefits from a higher profile and large numbers of recurring sales - two factors that result in substantial free cash flow generation. World of Warcraft in particular is a cash machine because the games 12 million players pay Activision a subscription fee each month to keep their accounts active. The evolving nature of WoW means that players are more likely to keep spending time (and money) on future franchise titles than they are to start over on a new series.
A debt-free balance sheet and more than $2.9 billion in cash should keep the firm’s 1.34% dividend yield flowing in 2012.
I also featured Activision recently in "5 Stocks for Your 2012 Portfolio."
Capital One Financial
Over the course of the last few years, Capital One Financial (COF) has been navigating the transition from one of the country’s largest credit card institutions to one of its largest banks. That shift from the credit business did a couple of important things for the firm: It provided Capital One’s lending business with a cheap source of capital, and it diversified away from the credit risk that shellacked COF’s shares during the height of the financial crisis.
Because Capital One grew its deposit base by acquiring established niche banks, such as ING Direct, the company was able to balloon its deposits quickly without sacrificing its financial health to do so. The firm remains in strong financial shape, with ample liquidity and plenty of dry powder in its coffers to increase lending or acquire another discounted business unit.
A strong brand name is one of Capital One’s biggest benefits. The firm has advertised wisely, gaining recognition through its popular TV commercials. Because more than 70% of profits still come from the consumer lending business, brand awareness is critical; after all, prime consumers are more apt to engage in financial dealings with firms that they perceive to be strong.
With analyst sentiment on the upswing, we’re betting on shares this week.
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, 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.