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5 Rocket Stocks to Buy for 2014 Gains - views
BALTIMORE (Stockpickr) -- Traders are gearing up for the start of another shortened trading week this morning, hoping to eke out every last bit of gains before the calendar flips over to 2014.
Across the Pacific, Japanese equity markets have already ended trading for 2013, taking home a 57% year-to-date gain -- the biggest one-year return for the country's Nikkei 225 Index in four decades. It's enough to make the S&P 500's 29% run this year look downright calm. Even though U.S. stocks aren't on track for quite as historic a close for 2013, we're still set to end the year on a very high note.
And that bodes well for 2014 as well. Looking back at every year since 1975 when the S&P earned greater than 20% gains, the year that followed averaged gains of 12.8%. So while I doubt the New Year will be able to keep up the breakneck pace in stocks, history suggests that it'll be a strong year for equities all the same.
That's why we're turning to a new set of Rocket Stocks worth buying 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 229 weeks, our weekly list of five plays has outperformed the S&P 500 by 84.7%.
Without further ado, here's a look at this week's Rocket Stocks.
By any account, 2013 has been a stellar year for shares of payment network MasterCard (MA) -- the $99 billion firm has seen its share price rally more than 68% in the last 12 months. Investors have some big tailwinds to thank for all that upside; and those macro factors aren't showing any signs of dying down as we head into another year.
MasterCard is the second-biggest payment network in the world, with nearly a third of the world's credit and debit cards bearing its logo. Like larger competitor Visa (V), MasterCard is a payment network only - that means that it doesn't carry credit risk on its balance sheet from lending cash to consumers and businesses. MA only facilitates the transaction for a fee, which means that the firm's revenues are tied to global spending volumes, not debt levels. Card networks tend to have a positive feedback loop -- consumers choose MasterCard, for example, because it's accepted nearly universally, and merchants accept MasterCard because of the large numbers of consumers who carry the card. That makes it even more challenging for new competitors to break into the field.
The big macro trend boosting MasterCard is the worldwide shift from cash to electronic payments. Despite the popularity of electronic card payments in countries like the U.S., the vast majority of worldwide transactions are still settled in cash. Because of the extra convenience and security of payment cards, that tide is turning - and MA and its competitors all stand to benefit from the growth.
MasterCard's momentum still looks strong heading into 2014, and that makes this Rocket Stock worth a closer look as we head into a new year.
Paychex (PAYX) has been another top performer in 2013, buoyed by growth in jobs numbers to eke out gains of more than 46% since the first trading day of the year. Paychex is one of the biggest names in the outsourced HR services business, providing around 550,000 small and medium-sized businesses with payroll processing. By hiring Paychex, business owners can avoid dealing with the bevy of tax and compliance minutiae that come with having employees.
Because Paychex's fortunes are tied to the health of the job market (it gets paid by having more accounts, after all), the firm faced a real problem heading into the soft economy of the Great Recession. To combat that, PAYX expanded its role, pulling out its massive customer Rolodex to offer other ancillary HR services such as 401(k) management and worker's comp insurance. Adding new services onto its menu gives Paychex another big revenue driver from its existing client base.
Going forward, the firm has a lot to gain from upward mobility in interest rates: historically, Paychex has earned considerable profits from its float portfolio -- the huge amount of cash it holds between the time employers deposit it and employees cash their paychecks. While extremely low interest rates have hurt PAYX's float income, there's a huge revenue stream waiting to be unlocked when rates perk back up. Paychex is another Rocket Stock name that's heading into 2014 with strong momentum in tow.
The automotive industry has fared well this past year, turning out the best sales numbers in a decade, as consumers replace a fleet that's older on average than ever before. That brisk sales pace has been a big tailwind for parts suppliers such as BorgWarner (BWA). Even if you're not familiar with the BorgWarner name, there's a good chance that your car is on the road today because of this $13 billion tier-1 parts supplier -- the firm makes engine and drivetrain components like turbochargers, timing belts, and transmissions for a huge group of automakers.
BorgWarner boasts a big customer list that includes the likes of Volkswagen, Ford, Daimler, and GM. The emphasis on increased efficiency without sacrificing performance has been a boost for BWA -- it's one of the reasons why the market for turbochargers has grown at brisk rates, and it's helped user in the adoption of diesel cars here in the U.S. Like any tier-1 auto supplier, BorgWarner benefits by locked-in customers; since automakers rely on BWA to produce specific parts for specific vehicles, switching costs are extremely high if Ford or Volkswagen decide to switch suppliers. And OEMs aren't likely to switch in the first place, since BWA's enormous scale means that it can produce quality parts more cheaply than most.
From a financial standpoint, BorgWarner is in solid shape, with a $1.4 billion cash and investment balance more than offsetting the firm's $1.2 billion debt load. The parts business is capital intense, but BWA has been a great capital allocator, keeping balance sheet leverage at zero. Look for a possible upside catalyst at BWA's next earnings call this coming month.
Hertz Global Holdings
Rental car company Hertz Global Holdings (HTZ) has been benefitting from strong car sales too. Hertz is one of the biggest car rental providers in the world, with approximately 10,400 locations in 150 countries. In addition to the firm's namesake brand, Hertz owns Thrifty Car Rental and Dollar Rent A Car.
Hertz operates in a concentrated, competitive market, but car rental strategies have been maturing in recent years. Rental firms have spent the last decade courting frequent business travellers more than before, partnering with airlines and credit card companies to offer more perks over prices. As travel spending continues to tick higher into 2014, a rising tide should lift all ships - but particularly league-leader Hertz.
I mentioned that Hertz was benefitting from car sales. A rental car firm's attractiveness hinges on a modern, well-equipped fleet of cars. To pull that off, Hertz has to sell its existing cars on the used wholesale market after just a couple of years. That quick turnover rate is a challenge when times are tough, but with used car prices soaring amid low inventory right now, higher proceeds should help buoy the firm's bottom line. With rising analyst sentiment in Hertz this week, we're betting on shares.
Red Hat (RHT) has found a winning solution for getting its software used in data centers: Just give it away for free. No, that's not charity -- Red Hat used its strategy to generate $1.3 billion in sales last year. The firm is one of the biggest providers of open source software, with its namesake enterprise Linux operating system the biggest piece of the empire.
Red Hat's product is essentially free -- and its consumer Linux distribution, Fedora, is completely free -- but the firm makes money through training, maintenance and tech support fees that it charges businesses. Red Hat has some very attractive arguments for corporate IT departments. Since the software is open source and free, licensing costs are nil and customization is far less expensive than it would be on a commercial server or workstation operating system. Selling open source software does mean that competition is stiff, but Red Hat's expertise and software packages keep customers coming back. As a result, RHT owns more than 60% of the Linux server market.
It's easiest to compare Red Hat's business to that of a technology consultancy, albeit one with a software product that's must-have for its customers. But the model means that RHT operates with low capital needs, no debt, and deep margins. As of the most recent quarter, RHT carries more than $1.3 billion in net cash and investments -- enough to cover more than 12% of the firm's market capitalization at current price levels. That's a big discount on a stock that few investors would think of as "cheap" right now.
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.