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5 Rocket Stocks to Buy After Last Week's Bounce - views
BALTIMORE (Stockpickr) -- You wouldn't know it by looking at the innocuous 0.78% move higher in the S&P 500, but last week was a critical one for Mr. Market.
After around three weeks of market corrections, last week brought a bounce for stocks right at the trendline that's acted as a floor for the big index all the way back to November. So even though last week's price action isn't a particularly big move, it was a make-or-break move for the rally that's been in play for the last six months now.
The bounce tells us one simple fact: Stocks can still catch a bid at support. And that demonstration of buying power in the broad market is a buying opportunity for investors this week.
To take full advantage, we're turning to a new set of Rocket Stock names to beat the market.
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 203 weeks, our weekly list of five plays has outperformed the S&P 500 by 80.83%.
Without further ado, here's a look at this week's Rocket Stocks.
The last few years have brought big changes for Abbott Laboratories (ABT), the biggest being the spinoff of the firm's pharmaceutical business into AbbVie (ABBV). Yanking the lucrative pharma segment out of Abbott's results provided investors with a much more distilled view of the firm's actual business and gave management a serious goal of shoring up its profitability in the very near-term. Pharma was a hugely profitable crutch for ABT, but its absence will ultimately make the firm a lot more competitive.
The new Abbott manufactures medical devices, nutritional products, diagnostic equipment and some generic drugs. To be sure, none of those are lackluster businesses to be in, but Abbott's over-reliance on its pharmaceutical segment has shown through. On the flip side, however, Abbott is now spared from the patent cliff that held a gun to the firm's head (and stock valuation) for the last several years, which is a plus.
Abbott still has some attractive cost cutting opportunities in the near-term, as it better integrates its existing product portfolio. Powerhouse offerings such as Xience stents and high-margin nutritional brands generate plenty of free cash flow, and the firm is already much leaner after applying its spin-off proceeds to its debt load. Shorter-term, rising analyst sentiment in shares is our reason for tacking ABT to the top of our Rocket Stock list.
2013 has been a good year for online travel site Priceline.com (PCLN). Since the first trading session of the year, shares of the firm have climbed more than 30%. That's around twice what the market averages have managed to turn out over the same period. With solid momentum behind its share price, Priceline has been leveraging its capital markets prowess to expand its horizons by buying travel media site Kayak, a move that's distinctly in the right direction. As PCLN continues to carve out a moat, investors should continue to carve out gains.
Priceline's success in the travel market has a lot to do with the reputation it earned back in the early days of online travel sales. Due in large part to the efforts of firms like Priceline, the U.S. travel market is largely commoditized at this point. For instance, it's become standard practice for travel sites to pen "lowest price" guarantees with hotels, a phenomenon that effectively means that it doesn't matter where you buy your next trip; you're probably going to end up paying the same price anyway. Priceline's large market share here at home guarantees it equally large sales volumes, and content-fuelled destinations like Kayak should help to drive new travelers there.
Commoditized travel less the case internationally, where the travel aggregation market is less mature and hotels and airlines are still eager to sell capacity at a discount. Consumers are also eager to buy it. International sales provide the biggest opportunity for margin expansion for PCLN, while legacy sales continue to keep the lights on.
Thompson Reuters (TRI) has managed to keep pace with the broad market in 2013. That shouldn't come as a huge surprise -- as one of the major financial data providers in the world, TRI's fortunes ebb and flow with those of Wall Street. While Thomson Reuters may be best known for its news service, more than half of the business is actually its markets data platforms, which license data to financial professionals through pricey subscriptions.
TRI is proof that being the second-tier player can be quite lucrative. While more standardized rivals like Bloomberg have become Wall Street staples (with extremely high levels of customer stickiness), Thompson Reuters has done a good job of making a case for licensing both platforms, not just one or the other. The company also has a significant non-investment business, providing legal, scientific and health care data to professionals in those respective fields. For all intents and purposes, investors should assume that this business has the exact same upside and challenges as the markets division.
On the financial side of things, TRI sports a solid balance sheet with a manageable net debt position. That balance sheet has been a key element of the firm's growth in the last few years, as acquisitions have been the lynchpin of the firm's strategy. As long as the firm continue to acquire key proprietary "must-have" platforms, it should continue to drive top-line growth among its existing base. If it can consolidate those platforms into a single high-end product, then it stands a chance at grabbing the industry's number-one spot.
The perpetual threat of Federal budget cuts to defense is starting to have an effect on investors. They're realizing that maybe the risks of spending cuts aren't such an imminent problem for defense contractors such as Northrop Grumman (NOC) -- the government would have to function for that to happen. That's a big part of why Northrop has rallied more than 24% in 2013.
Northrop Grumman is indeed one of the country's biggest defense contractors. The firm is a key player in everything from computer surveillance to UAVs to more conventional products like the B-2 bomber. It's an understatement to say that Northrop carries some customer risks: 90% of revenues come from Uncle Sam's pocket book. But as NOC's offerings continue to skew more towards mission-critical areas like cybersecurity, it suddenly looks a whole lot harder to justify cutting NOC's programs versus a non-defense program with fewer consequences.
In the meantime, the firm has joined its peers in checking out its options. It's been ramping up its IT services business, reaching outside DoD and courting other agencies as well as friendly international governments that need Northrop's expertise. A nearly debt-neutral balance sheet and a 2.9% dividend yield make NOC look extra attractive in this extremely low-rate interest environment.
CA Technologies (CA) is another firm that's banking big on IT spending increases. CA develops software and provides IT services to enterprise customers across the world. The firm's bread and butter comes from helping customers put their supremely costly mainframe computers to work -- the huge costs involved with mainframe computing help make CA's fees look bargain-priced as a result. Years ago, CA was primarily a hardware outfitter, but the firm made the well-timed shift to focusing on software for high-end enterprise installations.
That timing is paying off now, as resellers lose their edge in an extremely connected market. CA has also done a good job of positioning itself in line with the buzzwords of the day: namely cloud computing and virtualization. As those technologies continue to grow in popularity in corporate America, CA should continue to push its sales numbers higher, particularly with a customer list that already includes 99% of the Fortune 1000.
Exposure to cloud computing hedges CA's bets a bit, particularly as mainframes become a rarity in the IT world. While still relevant for a handful of processor-intense industries, the high costs of running a mainframe and increasing processor power from prosumer PCs have eaten away share of the enterprise market. CA's embrace of new tech could prove just as prescient as its move from selling servers.
With rising analyst sentiment in shares, we're betting on CA Technologies 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, 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.
Follow Jonas on Twitter @JonasElmerraji
Follow Jonas on Twitter @JonasElmerraji