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5 Rocket Stocks to Buy This Earnings Season - views
BALTIMORE (Stockpickr) -- Earnings season is adding an extra impetus for stock moves this week. We’re still at the front end of this earnings season, with only 51 stocks out of the S&P 500 already having reported their numbers to Wall Street -- with hundreds of firms slated to announce their earnings this week alone, we could see significant buying and selling get spurred on by Q4 performance data.
By and large, this earnings season is delivering a positive showing this quarter. Of those 51 S&P stocks that have reported their profitability to investors, 33 beat analyst expectations. And of the firms that posted negative earnings surprise, 65% were in the financial sector -- so clearly, things are more positive for the broad market than the raw data show.
To take full advantage of earnings season upside, we’re turning to a new set of Rocket Stock names this week . . .
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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 137 weeks, our weekly list of five plays has outperformed the S&P 500 by 83%. With that, here’s a look at this week’s Rocket Stocks.
First up this week is big pharma name Merck (MRK). Merck has delivered strong performance in the last year, rallying more than 15% in the trailing 12 months, not counting the firm’s now 4.29% dividend yield. But that stellar performance hasn’t spared the firm from the patent expiration problems that are plaguing most of the industry in the next few years.
For Merck, the biggest black cloud on the horizon is the loss of Singulair, a multibillion-dollar respiratory drug that loses patent protection this August. The entrance of generic versions of Singulair will be a major threat to Merck’s top line -- the company will need to find a way to replace that huge chunk of revenue. So, should you avoid this stock? No way.
While the Singulair loss is a major hurdle for Merck, the firm’s recent acquisition of Schering-Plough dramatically increases its drug pipeline, offering up a number of new drugs that could fill the revenue gap left by Singulair. With analyst sentiment on the upswing for this stock, we’re betting on shares. Keep an eye out for fourth quarter earnings on Feb. 2.
Industrial maintenance and repair supplier W.W. Grainger (GWW) is coming off the heels of a stellar year for shareholders; the firm’s stock rallied more than 35% in 2011, besting the broad market’s flat performance by a massive margin. Now, this firm is primed to continue that upside into 2012.
Grainger supplies companies with everything from paint to lights to hand tools, serving more than 2 million customers through more than 600 retail locations, a mail order catalog, and the firm’s Web site. Industrial maintenance supply is a hugely fragmented business, with scores of players and plenty of competition. At the same time, it’s a huge market that doesn’t really have a standard bearer in the traditional sense. Big name operations like Grainger and rival Fastenal (FAST) still have avenues for organic growth.
While some investors have been concerned by Grainger’s industrial exposure, the fact that its offerings make up such a small part of clients’ spending means that it’s much less impacted by a downturn than other industrial suppliers might be. A rock solid balance sheet with a deep net cash position adds to that staying power. Grainger’s earnings come out this Wednesday.
Agilent Technologies (A) is the world’s largest measurement solutions company, providing scientists and engineers with everything from atomic force microscopes to chromatographs. A diversified product range means that Agilent is able to serve a wide range of industries, from pharmaceutical makers to petrochemical and computer science firms.
Because of Agilent’s well-known name and huge installed base, the firm is able to generate easier sales opportunities than peers -- customers who are familiar with the use and precision of Agilent’s products are more likely to simplify their labs by sticking with them. At the same time, that brand credibility means that Agilent is able to generate attractive double-digit margins.
The firm took advantage of weak economic conditions in 2008 and 2009 to restructure its balance sheet and shore up its financial health. Today, the firm is much more capable of withstanding another economic contraction. Even though the firm’s next earnings call isn’t until the middle of next month, rising analyst sentiment is reason enough to pay attention to this name right now.
As a natural gas and oil exploration and production company, the last quarter has been distinctively positive for shares of EOG Resources (EOG). In the last three months, increasing demand and concern over renewed tension in the Middle East have contributed to a slow increase in oil prices, majorly benefitting the firms that pull crude out of the ground. That helps to offset the pain caused by a slow death for natural gas prices.
Around 73% of EOG’s production comes from natural gas. And while EOG’s conservative, extremely low-cost portfolio of gas-producing projects has helped to defend its net margins, those falling prices certainly haven’t made management’s job any easier. Many commodities analysts have been expecting natgas prices to reverse in 2012, buoyed by the continued ratcheting higher of oil. After all, the price difference between the two energy sources is likely to spur some substitution of natgas for crude -- but thus far, it just hasn’t happened.
That’s why material exposure to oil prices has been a major boon to EOG’s profitability. It’s likely that we’ll see natural gas prices rebound in the mid to long term. When that happens, EOG should benefit disproportionately. In the mean time, watch out for earnings on Feb. 17.
AGCO Corporation (AGCO) is a major producer of heavy farming equipment in the U.S., manufacturing tractors and combines under a handful of brand names. While peers like Deere (DE) may be better known to consumers, AGCO is a major player in commercial agriculture machines both domestically and abroad -- investors shouldn’t ignore this firm.
AGCO is another Rocket Stock whose fate is heavily tied to commodity prices. Not surprisingly, when prices for agricultural commodities (such as wheat and corn) are rising, farmers are better able to upgrade their high-cost equipment. Lately, rising prices in those soft commodities has created a strong market for heavy agricultural equipment sales. That’s especially true abroad, where many emerging market countries are still in the process of converting fields to Western commercial farming techniques. As farmers in India and Brazil (two of AGCO’s key markets) buy new equipment, this firm stands to benefit.
A strong balance sheet and a large international installed base should mean additional upside for AGCO shareholders. Investors should keep an eye out for the firm’s Feb. 7 earnings call…
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.
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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.