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5 Rocket Stocks to Buy After Last Week’s Rally - views
BALTIMORE (Stockpickr) --Whew, what a week.
Last week brought a 2.29% gain to the S&P 500, pushing the big index to new all-time highs on Thursday before a modest 0.28% correction calmed the animal spirits on Friday. That rally pushes the S&P’s year-to-date gains up to 11.4% -- a significant return just a quarter and change into the new year.
But the 2.29% bump in the S&P doesn’t really tell the whole picture of gains from last week. While the big index moved a couple hundred basis points, a large number of individual stocks posted much bigger moves for the week. Last week’s Rocket Stocks list, for instance, saw an average move of 5.13% from Monday’s open through Friday’s close.
To take full advantage of this week’s upside, we’re turning to a new set of Rocket Stock names.
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 195 weeks, our weekly list of five plays has outperformed the S&P 500 by 76.5%.
Without further ado, here’s a look at this week’s Rocket Stocks.
As a prototypical blue-chip stock, it’s not a huge surprise that IBM (IBM) has been keeping pace with the S&P so far this year. IBM is one of the biggest IT firms on earth, offering clients everything from high-end computer hardware to software and services. And as enterprise IT spending continues to enjoy some economic tailwinds, IBM’s upward trajectory should continue.
IBM has made a stock and trade from being first to the punch. Most recently, that’s been evident from the firm’s exit from the consumer PC business back in 2005. Many of the firm’s former PC-maker peers are only now starting to look at the enterprise market after their bread and butter became increasingly commoditized. IBM’s prescience should continue to benefit the firm in a big way.
Not all computers have become commoditized in 2013. Mainframe computers are still big business for IBM. High barriers to entry in the mainframe business give IBM a defensible moat against new entrants stealing share, even as economic tailwinds spur mainframe upgrades at major financial, research and communications firms. With a big menu of IT offerings and a hefty customer Rolodex replete with cross-selling opportunities, IBM should continue to do well this year.
Wells Fargo (WFC) hasn’t lost its reputation as the best of the big banks. The firm entered the Great Recession in better shape than peers, and it’s exited the same with a much less labyrinthine balance sheet. That financial clarity is a very good thing for investors right now.
That doesn’t mean that Wells Fargo has been without fault. The firm has made some big missteps in the mortgage market, and for better or worse, Wells is still one of the “too big to fail” banks. But the downturn provided some big opportunities for Wells Fargo, most notably through the 2008 acquisition of beleaguered Wachovia; the purchase doubled WFC’s size as well as its profit potential for investors.
The Fed has provided an interesting environment for financial services firms. With interest rates scraping along the zero mark, earnings are understated at banks right now. That means that when rates eventually begin to rebound (the most recent Fed minutes point to that possibly starting late this year), profits should balloon. For investors looking for big bank exposure without all the baggage, it’s hard to beat Wells Fargo.
Now with rising analyst sentiment in the San Francisco-based bank, we’re betting on shares.
Auto parts supplier Delphi Automotive (DLPH) has had anything but a quiet life over the last couple of decades. The firm that started out as General Motors’ (GM) parts business went bankrupt a full three years ahead of the Great Recession, only to emerge in late 2009. But now, with the firm’s operations and cost structure reworked, the firm is able to stay profitable.
Delphi has kept its tight relationship with GM. The firm still generates around 20% of total sales from the Detroit-based automaker, supplying everything from electrical components to safety products to the powertrain modules found in GM’s cars. Less attractive is Delphi’s exposure to the Eurozone; the firm currently generates close to half of its sales in Europe, a market that continues to be challenged by economic headwinds.
Despite the remaining hiccups along the road for Delphi, the firm’s rebound to profitability comes with some big advantages. One of the biggest is the fact that cars in the U.S. are older than ever before, a trend that should keep auto sales strong in the world’s biggest car market. With switching costs extremely high for car manufacturers that use Delphi components, the firm has a major competitive advantage vs. rivals. That should keep Delphi at the top of the OEM auto parts pack.
It’s been a good year for Time Warner (TWX). The $55 billion media and entertainment company has seen its shares climb more than 24% since the first trading session in January, besting the broad market’s impressive ascent by more than double. A lot of that upside has been thanks to the firm unlocking value from its massive store of content. 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.
More recently, a lot of buoyancy in TWX has come from its least profitable content. More specifically, because the firm has decided to split its magazine unit, Time Inc., off of the rest of the business. Unloading Time should help boost margins at TWX, and generally increase earnings quality.
The firm’s portfolio of entertainment brands and content should continue to be a powerful income generator in the years ahead. That’s especially true as cable networks and online services such as Netflix (NFLX) begin paying to access Time Warner’s legacy content. As the firm’s active studios continue churning out TV shows and movies, that content portfolio keeps getting more valuable.
We’re betting on upside in shares of this Rocket Stock this week.
The housing recovery in 2013 has fueled a similar boon for shareholders in Home Depot (HD) -- the world’s biggest home improvement retailer has rallied by more than 19% since the calendar flipped over to 2013. That relative strength looks likely to continue into the second quarter.
Home Depot is the largest home improvement chain in the world, with 2,250 stores spread across all three countries in North America. The firm’s customers include retail consumers as well as wholesale construction buyers, positioning that’s given HD a more direct route to housing spending than smaller hardware competitors. Overly aggressive growth was Home Depot’s biggest problem in the last few years -- and management learned important lessons as a result. Going forward, the firm should be able to avoid repeating history while growing its geographic footprint more cautiously
Home improvement spending decoupled from the housing market back in 2008, breaking Wall Street’s view that a housing bust would destroy sales for home improvement retailers. That revenue resilience justifies a higher multiple now that sales are back in full swing.
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.