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5 Rocket Stocks to Buy for Earnings Season - 16845 views
BALTIMORE (Stockpickr) -- Earnings season is in full swing this week -- and it looks like positive earnings surprise is the name of the game once again.
Solid earnings numbers from the likes of Google (GOOG) and Citigroup (C) are getting this earnings season off to an auspicious start for the second quarter, pushing fundamental valuations even lower in July. On a fundamental basis, stocks are already looking cheap right now. Dow stocks , for example, are more profitable now than anytime in history, even besting pre-2008 performance numbers.
More strong earnings releases this quarter could trigger a sentiment shift big enough to shove stocks out of their slump. We’ll position ourselves this week with another set of Rocket Stocks for this week.
More From Stockpickr
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.
It’s a strategy that’s been working out pretty well. In the last 112 weeks, Rocket Stocks have outperformed the S&P 500 by a very material 78.4%.
With that, here’s a look at this week’s Rocket Stocks.
Atlanta-based home improvement retailer Home Depot (HD) has been shaking up its business in the last couple of years, restructuring operations and leaning out its store footprint to ensure that it can take economic hiccups down the road.
Not surprisingly, Home Depot took some major hits in the wake of 2008, as the credit market seized and Home Depot found itself without homeowners flush with refinancing cash. In the years since, this stock has managed to turn the corner.
One of the biggest barriers to Home Depot’s success was its own appetite for growth. During the housing boom, HD expanded its reach alongside its operating leverage, setting up a very unfavorable financial situation once the bottom fell out of the market. During the crisis, though, Home Depot decided to focus on its own internal issues rather than waste resources trying to court dwindling numbers of customers. As a result, the company is leaner and more competitive as cash starts flowing into its registers once again.
Size still remains Home Depot’s biggest advantage over its peers. With a full 16% of the home improvement market, the company is able to leverage sizable economies of scale in its business. Management has been using its turnaround success to reward shareholders recently -- the firm’s dividend yield currently sits at 2.78%, making it one of the highest-yielding retail stocks.
We’re betting on shares this week.
Household products giant Colgate-Palmolive (CL) is one of the world’s biggest manufacturers of personal care products such as toothpaste, shampoo and soap. Those “boring” products are precisely what make this company so exciting for investors -- it’s a league leader in one of the most recession-resistant aisles in the grocery store.
Colgate has more than a century of operational history under its belt, a factor that certainly comes into play when consumers are deciding whose products to spend their cash on. Because toothpaste and other oral care products feature “stickier” customers and attractive pricing power than other categories of personal care products, Colgate is able to wring out deeper margins than many of the other large manufacturers whose products fill supermarket shelves.
But the biggest reason to watch Colgate is the company’s exposure to emerging market consumers. Colgate has been working on increasing its sales overseas for years, and it’s paid off. Currently, the company takes home nearly half of the world’s spending on oral care products like toothbrushes and toothpaste. Investors should watch the firm’s July 28 earnings call.
Regular Rocket Stocks readers know that I’m a fan of luxury handbag maker Coach (COH). It’s not the company’s purses that have me eyeing stores, though -- instead, I’m continually impressed by management’s ability to perform at an incredibly high level despite the slew of economic headwinds that have battered peers. During the recession, Coach actually grew at a bull market clip, and shares are up another 18% in 2011.
So what’s the secret?
The firm’s approach to the recession was two-pronged. First and foremost, the company took on the dangerous avenue of cutting prices -- a difficult thing to do without sacrificing brand cachet. At the same time, management looked for growth opportunities abroad, capitalizing on an already mature luxury apparel market in Japan and a less-mature market in China, for instance.
The lion’s share of Coach’s revenue still comes from North America, where consumer spending has slowly been on the upswing. That’s a bullish factor to consider for the rest of 2011. While the company doesn’t sell near the deep-discount valuation that the stock saw in early 2009, there’s still upside in shares this year.
Bed Bath & Beyond
Home furnishing retailer Bed Bath & Beyond (BBBY) is another name in the retail-centric list of stocks we’re looking at this week. The company operates more than 1,100 stores in North America, with brands that include Christmas Tree Shops, Harmon and Buybuy Baby in addition to the company’s namesake Bed Bath & Beyond locations.
Of those stores, nearly 88% are Bed Bath & Beyond locations, a statistic that speaks to the success of the model as well as the growth potential of the firm’s other concepts. Even though housewares remain a relatively tough sale in 2011, Bed Bath & Beyond has been capturing a disproportionate share of the market, eking out growth in each of the last four years.
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More impressive than that is the way the firm has paid for that growth. Instead of racking up debt to fund new store builds, the company’s paid for all of its locations with its own cash. Today, that means that Bed Bath & Beyond sports a debt-free balance sheet and more than $1 billion in cash in the bank -- two factors that should help the firm remain strong should the economy soften again in the mid-term.
Bed Bath & Beyond shows up on a recent list of Jim Cramer's Buying Opportunities.
M&T Bank (MTB) is one of the few financial institutions that deserves the “big regional bank” moniker. As one of the biggest banks in the U.S., M&T is exposed to most of the regulatory challenges faced by the larger names. At the same time, an attractive regional banking model means that M&T enjoys deep margins and a sizable dividend payout. Don’t discount the upside on this stock in 2011.
Like most other regional banking names, M&T Bank avoided most of the financial wrangling that got bigger national banks in trouble in 2008. So now, while the “too big to fail” names switch their focus to retail banking and fee-based revenues, M&T is just conducting business as usual.
Because M&T maintained higher underwriting standards during the boom, the company’s balance sheet is comparatively robust right now, and net margins are able to ring in at more than 20%. Investors should keep an eye on M&T’s second quarter earnings call on Wednesday.
To see 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.