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5 Rocket Stocks to Buy for Earnings Season - views
BALTIMORE (Stockpickr) -- Earnings season officially kicks off with Alcoa's (AA) fourth quarter numbers on Tuesday, bringing on the first quarterly data dump of 2013. With the strong start to the New Year we've already enjoyed, it's going to be important to see earnings numbers follow suit.
And the early indications suggest that they will.
Other economic fundamentals have been throwing off some auspicious hints of their own over the last couple of weeks. Unemployment's holding steady at the lowest rates since the Great Recession, housing numbers are picking up, and it looks likely that guidance -- rather than earnings releases themselves -- will take the spotlight starting this week.
If the first week of 2013 is any indication of what we should expect for the year ahead, we're in store for some big gains. Last week, the S&P 500 put 4.57% in between its opening value and Friday's close. I've been talking about the possibility of a rally for a while now, but earnings season should give that outlook its first real test.
Still, as well as the S&P did last week, our list of Rocket Stocks managed to do one better, ending just shy of 4.9% for the week. That's reason enough to take a closer look at a new set of Rocket Stock names for 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. In the last 183 weeks, our weekly list of five plays has outperformed the S&P 500 by 73.2%.
Without further ado, here's a look at this week's Rocket Stocks.
First up is $24 billion cosmetics firm Estee Lauder (EL). EL owns popular brands like Clinique, M-A-C, and Origins in addition to its namesake makeup label, reminding investors just how attractive selling makeup can be -- no pun intended. That's because Lauder's net margins consistently ring up in the double digits, and the firm boasts an attractive sales mix that's spread across a large number of target markets. At last count, only 40% of Estee Lauder's sales are earned in the U.S.
Cosmetics are luxury goods that sit in an attractive space. For starters, consumers aren't likely to forgo makeup for budgetary constraints; they're more likely to trade down their brands than they are to go without. On the flip side, luxury consumables like cosmetics rarely have a large correlation between selling price and input costs. Estee Lauder hits both of these benefits because of its wide product net -- because the firm sells brands positioned all along the cost spectrum, it can continue to sell in tougher times and boost margins when consumers are willing to spend more on makeup.
Emerging markets offer a big growth opportunity for Estee Lauder right now, with a burgeoning population of middle class women is eager to trade up their makeup. A hefty cash position on Estee Lauder's balance sheet effectively offsets its debt load, providing ample liquidity for the firm. Earnings on February 22 could be a big price catalyst for this stock in the near-term.
Oil service firm Halliburton (HAL) is having a good start to 2012 -- shares of the $34 billion company have rallied nearly 5.7% since the market opened on January 2. In a sentence, Halliburton helps oil companies pull crude out of the ground. The firm is involved in pressure pumping, drilling, and other services for sites in more than 80 countries.
Halliburton's expertise in integrated drilling gives it a big advantage in pulling that oil out of the ground cheaply, something that's critical for cost-conscious oil firms. While HAL's income statement isn't directly impacted by crude prices, they obviously impact its clients' decisions about when to bring new drill sites online. Even though oil prices have trudged sideways for the last few months, they're on the high side of their historic range, a fact that makes more oil drilling projects economically viable.
For the past few years, Halliburton has been putting effort into integrating more services for clients. That should help make the firm more competitive in the near-term, and it should help boost margins in 2013 as well. Meanwhile, earnings on January 25 offer up a big possible catalyst for upside in this stock.
Spirits maker Beam Inc. (BEAM) has been quietly telling a post IPO success story following its spin-off from Fortune Brands (FBHS) in 2011. The firm has rallied more than 36% since then, a time when the S&P made just over half that. Beam is best known for its namesake Jim Beam brand, as well as other bourbon labels like Maker's Mark and its stable of small batch bourbons. It also makes Sauza tequila, Courvoisier, DeKuyper and the Skinnygirl line of ready to drink products.
The move to a pure play spirits manufacturer was a smart one for Beam's shareholders -- it gave them exposure to Beams best qualities without adding on the needs of a set of completely disparate businesses. Even though Beam owns a handful of second-tier liquor names, it makes up for that with its strength in the bourbon market, where it's the number-two distiller by volume. Even though competition is fierce in the spirits business, so is brand loyalty. A sticky customer base should help keep well loved brands like Makers throwing off considerable cash.
That cash should continue to come in handy deleveraging Beam's balance sheet. The spin-off left the firm with considerable debt, but management has done an admirable job of paying that down so far. The firm's 1.3% dividend payout helps to round out the shareholder yield focus that shareholders are getting right now at Beam.
Southwest Airlines (LUV) isn't a typical legacy airline -- and until recently, that's been the secret to Southwest's success. The firm boasts a fleet of around 700 aircraft, primarily Boeing's (BA) 737, serving flights to more than 110 cities worldwide.
Southwest's decision to do away with the conventional hub approach to flying was critical to the firm's ability to compete against the airline establishment. By focusing on profitable routes over network size, the firm was able to wring more dollars out of every seat on the plane. The AirTran acquisition dramatically increased Southwest's scale, giving it exposure to a slightly different demographic that includes two-class cabins for a change. The addition of Hawaii and potentially new international routes to Southwest's route map is worth thinking about for investors -- it adds considerable risks (the economics of each flight are more volatile for longer-haul flights), but it also comes with some big potential rewards.
Financials are paramount for any airline -- and Southwest's balance sheet is respectable. While aircraft leases make up a huge piece of LUV's balance sheet, the firm's $3.2 billion cash position otherwise make its debt neutral. Southwest has historically been skilled at hedging for its biggest cost: fuel. While it's biggest fuel cost advantages have expired, the firm's hedging program is still appealing in an environment where oil isn't getting any more plentiful. Watch out for earnings later this month.
The last 12 months have been surprisingly strong for shares of chipmaker Broadcom (BRCM) -- the firm has seen its shares rally more than 14% over the time period, while the rest of the semiconductor industry has actually lost 8%. But Broadcom's communications focus accounts for a lot of that relative strength -- as a key mobile device supplier, BRCM is one of the few semiconductor firms that's continued to get breakneck demand for its wares in the last two years.
Broadcom's bread and butter is research and development. Unlike most of its peers, the company doesn't own its production facilities. Instead, it outsources those tasks to third parties. While that means that BRCM sacrifices some profitability to its manufacturing contractors, the fact that BRCM doesn't carry chip factories on its balance sheet (and their associated overhead on its income statement) means that the firm cuts a leaner profile.
As technologies led by BRCM -- like GPS, Bluetooth and Wi-Fi -- get adopted on more and more devices, BRCM should have some big tailwinds pushing it along. At the same time, as more households continue to acquire multiple devices with Broadcom chipsets (like a tablet, a smartphone, and a TV set top box), the market for the firm's chips should continue expanding in kind. That rising tide of sales is already apparent on BRCM's income statement -- so we're betting on shares of this Rocket Stock this week. Investors should be aware of this company's earnings call on January 31.
To see all of this week's Rocket Stocks in action, check out the Rocket Stocks portfolio at Stockpickr.
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.