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5 Rocket Stocks to Buy for August - 29947 views
BALTIMORE (Stockpickr) -- It looks like the biggest black cloud over investors’ heads could be about to blow away.
Congress is a few hours away from voting to resolve the debt crisis situation, a looming problem that’s been the single biggest deterrent to buying pressures on Wall Street for the last several weeks. This morning, stocks are kicking off the week on a strong note for a change. It’s a welcome move given the 3.92% slide that the S&P 500 took in the last week.
As earnings continue to best analyst expectations this quarter, August may be a distinctly bullish month for investors. To take full advantage, we’re turning to a new set of Rocket Stock plays.
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 quantitative screen that seeks out stocks with a combination of analyst upgrades and positive earnings surprises.
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It’s a strategy that’s been working out pretty well. In the last 114 weeks, Rocket Stocks have outperformed the S&P 500 by a very material 79.9%.
With that, here’s a look at this week’s Rocket Stocks.
Despite numerous false starts for the market in 2011, fast food giant McDonald’s (MCD) is still having a solid year for shareholders. The company’s stock is up 12.7% since the first trading day of January, vs. less than 3% gains from the S&P 500. With another quarter of strong sales ringing in at the end of July, now looks like a solid time to pick up shares of this stock.
McDonald’s was a shining star during the recession because its low price and innovative, higher-end offerings made the firm a viable substitute for more expensive dining options as consumer purse strings tightened. And while most food companies have been sacrificing margins amid rising food costs, McDonald’s wasn’t one of them. In fact, the company managed to dramatically expand its profitability in the last few years, bringing its net margins consistently above 20%.
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As the world’s largest restaurant chain, McDonald’s has scale and efficiency advantages that can’t be matched by smaller competitors. Because four-fifths of the firm’s restaurants are owned by franchisees, the company is able to generate consistent franchise and rent revenues that aren’t beholden to economic conditions, and can flow almost straight to McDonald's bottom line.
A nearly 3% dividend yield makes McDonald’s even more attractive right now. The stock is one of the Dividend Aristocrats, having raised its dividend every year for at least 25 years.
McDonald's is also one of TheStreet Ratings' top-rated restaurant and hotel stocks.
Analyst sentiment has also been on the upswing for shares of health insurer Cigna (CI) in recent months. The company provides health coverage to around 11 million members, in addition to a more mainline insurance business. While the mainline business does add some complexity that peers don’t have, it also helps protect Cigna’s income statement from the potential effects of health-care-related legislation.
As one of the nation’s largest insurers, Cigna’s financial exposure to health care reform measures was largely mitigated by its reliance on large corporations as customers rather than small business members. Because Cigna only acts as an administrator on those plans, the firm is able to collect a fee in exchange for its expertise -- without the added balance sheet risks of insuring those corporations’ employees.
In the health insurance business, size isn’t only important for customers; it’s also crucial for insurers. After all, Cigna’s size has a big impact on its ability to negotiate with health care providers, who provide their services at a preset rate to Cigna members. Even though Cigna is on the smaller end of the large insurers, the firm certainly has the scale to negotiate rates effectively. Investors should watch for Cigna’s earnings on Aug. 4.
Apollo Group (APOL) is the education firm behind the University of Phoenix, one of the largest for-profit schools in the world with around 350,000 enrolled students worldwide. The firm’s target demographic is the working adult, a group that’s currently underserved by traditional university infrastructure. As a result, Apollo has been able to generate double-digit growth rates in recent years.
Surprising though it may seem, the recession actually provided Apollo with another tailwind as recently unemployed people looked to expand their marketable skills by pursuing a degree. Cheap government funding for education was one of the biggest reasons why the firm was able to drive so many students in the door.
But that may not last long. Significant regulatory pressures are starting to be levied on the for-profit education business, piling on rules that could dramatically reduce the amount of grant funding available to students at a number of these schools. That said, Apollo is probably best positioned to ride out the change right now, and could actually benefit as less legitimate competitors close up shop.
We’re betting on shares this week.
It’s been a reasonably strong year so far for maintenance product supplier W.W. Grainger (GWW). Shares of the $10.4 billion firm have rallied more than 7% in 2011 despite the tepid performance being wrung out of the broad market. As economic production continues to move out of synch with the stock market, Grainger should also fare well in the latter half of the year.
With offerings that range from tools to safety gear, Grainger is one of the biggest suppliers of industrial maintenance products in the country. Even so, competition is stiff in this fragmented business, and competitors such as Fastenal (FAST) are similarly appealing to investors. To counter that, Grainger has been working on increasing the number of SKUs in its catalog and widening its reach through direct mail, retail stores and its Web site.
Because Grainger is able to handle the massive logistical challenges of keeping a massive product inventory ready to deliver at a moment’s notice, customers are able to rely on the firm to keep them stocked on short notice. That reliance means increased customer stickiness as less direct peers can’t compete with Grainger’s efficiency or selection. While the maintenance product business is cyclical, Grainger is suited to do well right now.
Oil service giant Halliburton (HAL) has been reaping the benefits of high oil prices this year. High oil means that a greater number of oil wells suddenly become economically viable, which drives demand for oil servicers such as Halliburton. With oil hovering around the triple-digit mark for much of the year, the entire industry is seeing increased profitability.
Because Halliburton has positioned itself as an integrated oil service company, it’s been able to expand the amount of work it does for any individual project -- and muscle out less-inventive peers in the process. While integrated oil servicing is working incredibly well for Halliburton domestically, there’s still room for the company to grow abroad. That’s where investors should set their sights right now.
We’re betting on shares as analyst sentiment increases for shares.
To see all of this week’s sentiment plays 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.