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5 Rocket Stocks to Buy After the Greek Vote - views
BALTIMORE (Stockpickr) -- Well, it’s over. On Sunday, Greek voters elected the New Democracy party, a group that’s pro-bailout and pro-austerity. That win should give investors some comfort over one country in the eurozone. Now all eyes are turned to Spain.
Spain unseated early gains in stocks across the pond after the vote, as yields on Spanish debt reached a new record. In other words, investors aren’t willing to loan money to Spain right now unless they can get more money than ever for taking on the risk. Still, the EU is finally showing some promise; last week’s 100 billion euro bailout of Spanish banks was a first step toward setting the Mediterranean kingdom (and stocks) on the right path.
Despite this morning’s wishy-washy open, we’re looking at five new Rocket Stock names that could find upside 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.
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In the last 155 weeks, our weekly list of five plays has outperformed the S&P 500 by 83.12%.
With that, here’s a look at this week’s Rocket Stocks.
First up is Colgate-Palmolive Company (CL), the $48 billion consumer products firm. The company manufactures and sells everything from toothpaste and detergent to shampoo, deodorant and even pet food. 2012 has been a strong year for CL, with shares up 9% on the year following a steady climb above the $100 mark. This stock should be able to keep its relative strength strong in the second half of the year.
Colgate-Palmolive’s scale is a major advantage. The firm owns around 45% of the global oral care business, an operation that’s the firm’s crown jewel, and a major inroad into international markets that have historically made up a smaller part of sales. Oral care boasts stickier customers (store brands aren’t as easily interchangeable for brand names in this area), and it generates hefty margins.
That doesn’t mean that investors should ignore the other parts of Colgate’s business. The firm’s entrenched in grocery store shelves, and should continue to churn out strong performance from its personal and house care brands, particularly in the U.S.
Colgate is the quintessential blue chip. By that, I mean that the firm has a strong balance sheet, ample cash flows and a history of returning cash to shareholders in the form of dividends. With a yield that currently weighs in at 2.44%, income investors could do worse than CL right now, especially given the firm’s upward price trajectory.
Colgate shows up on a recent list of 8 Stocks to Help Keep the Bear Market at Bay.
Big-box retailer Target (TGT) is another name that’s enjoying strong stock performance in 2012. Since the first trading day in January, shares of the $38 billion retail giant have climbed more than 14%, besting the broad market by a big margin. Target has been making some big changes in the last few years, and now it's just starting to show up on the firm’s income statement -- the biggest is the introduction of grocery items.
Target is mirroring the strategy at Wal-Mart (WMT) by introducing what it calls PFresh, a grocery initiative that it’s been implementing in a growing number of remodeled stores across the country. The idea is that shoppers can find great deals on groceries at Target stores, and the firm can leverage that added store traffic to sell items that boast higher margins.
Because grocery is a comparatively low-margin business, one result of Target’s initiative is diluted net margins for the whole company, but those lower margins are by design. The margin dilution should generate bigger sales and bigger profits on an absolute level, a welcome tradeoff for Target’s management.
Target has proven adept at courting a specific niche of big-box shopper. By presenting itself as a slightly higher-end alternative to the likes of frequently panned Wal-Mart, replete with exclusive designers and products, the firm should continue to perform at a high level. Expansion into Canada looks like the other big growth catalyst investors should have on their radar.
Xerox (XRX) has transitioned from being a technology manufacturing firm into a document management firm -- a subtle change but also an important one. While high-end office printers still make up a major chunk of revenues, professional services now also contribute a material portion of sales, a sign that the firm is willing to embrace new trends in the industry and avoid commoditized parts of the business.
Black-and-white printing is one area that’s become commoditized in the last few years. Print quality has essentially become the same across most major black and white laser printer manufacturers, so Xerox has taken its resources from black and white printing tech and moved it over to areas where its R&D can actually build a better mousetrap. Niche solutions such as color printing and digital production presses are the areas where the firm’s product unit is focusing its attention instead.
At the same time, services are becoming a much more important part of Xerox’s business. Servicing printers historically generates more revenues than the printer’s original cost, a fact that provides XRX with sticky recurring revenues. Higher-end professional services, such as document outsourcing, are becoming a more important part of XRX’s sales as well.
With rising analyst sentiment in shares this week, we’re betting on Xerox.
$7 billion pet product retailer PetSmart (PETM) is another Rocket Stock that’s made our list this week. The firm boasts a footprint of 1,250 big-box stores spread across the country, selling products like pet food, supplies, and toys as well as smaller pets and services like grooming or training. But the best thing about PetSmart is the fact that more than half of its sales come from consumables.
Because such a big part of PetSmart’s product mix is driven by consumables, the firm boasts big recurring revenues as consumers replenish their supplies of pet food and treats. While other major retailers all stock pet products, they can’t match the sheer scale of offerings at a store like PetSmart, or the expertise of the associates who work there. That’s what keeps customers coming back -- and what keeps margins and cash generation higher than most non-specialized retail firms.
Another major trend in PETM’s favor has been the increase in how much Americans are willing to spend on their pets. Consumers have gone from treating pets like animals decades ago to treating them much more like humans today -- and spending on pets has doubled since ten years ago as a result.
Mid-cap tool firm Snap-On (SNA) is having a banner year in 2012, driven by a vehicle fleet in this country that’s older now on average than it’s ever been before. Shares of Snap-On are up more than 24% since the start of 2012 as sales continue to outpace analysts’ expectations.
Snap-On sells its tools and diagnostic equipment to a diverse mix of customers, most of whom are professionals who work on cars, trucks, planes, or other machines. Independent car techs are the biggest buyer of Snap-On products, served by a fleet of 3,200 vans that sell and deliver tools directly to potential client shops. That control of the product from manufacture to delivery gives SNA precision control over its costs, a fact that’s helped the firm react to economic headwinds in the last few years.
An eye to emerging markets could provide significant growth opportunities for Snap-On, as the firm looks at courting the tool market in China. Even a modest success in the People’s Republic could yield significant performance improvements for SNA’s shareholders -- we’re watching this Rocket Stock 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.