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5 Rocket Stocks to Buy at End of October - 14218 views
BALTIMORE (Stockpickr) -- History, it seems, is repeating itself again this week. Last Monday, the S&P 500 index was opened following a push that brought the index just shy of its 1225 resistance level. This week, we’re sitting on the heels of another significant end-of-week push higher -- one that shoved stocks definitively above that resistance level. The question now is whether we’ll get some positive continuation in today’s trading session.
From a fundamental standpoint, stocks are still looking strong this earnings season. Approximately 70% of S&P 500 constituents have bested Wall Street’s expectations for third-quarter earnings, the third consecutive time that analysts have grossly underestimated the profitability of corporate America in 2011.
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On the more technical side of things, seasonality is holding up well. The broad market is up around 10% since the start of October, historically the start of the best-performing four-month stretch for stocks. With October’s final trading week before us, it’s time to turn to a new set of Rocket Stocks to eke out gains in this still uncertain 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 126 weeks, our weekly list of five plays has outperformed the S&P 500 by 78.8%. This week, we’ll aim to continue beating the market with another set of names.
With that, here’s a look at this week’s Rocket Stocks.
Last week was a big one for Abbott Labs (ABT). Not only did the $84 billion firm release strong earnings, Abbott also announced that it’d be splitting its operations into two distinct companies: a pharmaceutical firm and a medical products company. There’s been a lot of commentary about the positives and negatives about the move. Ultimately, I think that it’ll be a strong positive for shareholders of the unified firm today. Scale won’t be impacted, and the split up will likely result in a refreshed view of the combined value of both firms.
While credit default swaps traders are pricing in a higher premium for Abbott’s debt, the kneejerk reaction may be a bit overblown. After all, Abbott’s businesses are mature, and they generate significant cash. While an aggressive acquisition strategy has left the firm with a net debt load, it’s mitigated by an $8.9 billion cash position on the firm’s balance sheet.
In the past, the firm’s pharmaceutical operations have overshadowed businesses like nutritionals and diagnostic products where Abbott has some impressive growth potential. That should be about to change. Management expects the firm’s 3.56% dividend yield to be sustained following the split up.
Bed Bath & Beyond
Home furnishings retailer Bed Bath & Beyond (BBBY) has carved out an enviable position in consumers’ minds, bolstered by the popularity of its namesake stores as well as growing brands such as Christmas Tree Shops and buybuy Baby. In spite of a challenging retail environment in 2011, shares of Bed Bath & Beyond have managed to rally more than 25% so far this year -- an impressive feat given the broad market’s underwater status over that same period.
Innovative and unique products are Bed Bath & Beyond’s strong suit. By attracting customers to its stores with a combination of novel products and must-have non-discretionary house wares, the firm has been able to capture growth each of the trailing five years. What’s more impressive is how they’ve done it.
BBBY’s expansion has historically been fuelled by cash rather than debt. That lack of borrowings meant that this firm was in extremely solid financial health during the height of the recession. While peers struggled to reduce their own debt loads, Bed Bath & Beyond continued to churn out top and bottom line improvements.
Relative strength is exceptional this year for this Rocket Stock; all things considered, we’re betting on shares this week.
Bed Bath & Beyond is one of the top holdings at Ken Heebner's Capital Growth Management.
We’re going relatively retail heavy this week, with the presence of Nordstrom (JWN) on our list of Rocket Stocks. While Nordstrom courts a different demographic of consumer than BBBY, the firm is showing off similar performance year-to-date in 2011: shares have rallied almost 22% over that same period.
Nordstrom is a department store chain that sells higher-end products in 115 full-line anchor stores and almost 100 clearance Nordstrom Rack locations. That high-end position has been under attack from analysts this year, but the argument against luxury spending hasn’t held up; in fact, luxury spending has been stronger than overall consumer spending this year.
Unlike Bed Bath & Beyond, however, this department store chain wasn’t immune from the recession. While it’s seen significant margin recovery and a re-stuffing of cash into its coffers in the last couple of years, management is well aware of the firm’s susceptibility to economic headwinds.
That said, the relative strength in luxury spending should continue to buoy shares in 2011.
Nordstrom shows up in the portfolio of Steven Cohen's SAC Capital as of the most recently reported period.
Red Hat (RHT) has made leaps and bounds in the last five years. The enterprise software firm has more than doubled the average industry growth rate over that period, clocking in at an annualized 27% increase versus just shy of 12% for other software firms. More surprisingly, Red Hat’s done it by selling open source software -- software whose code is freely available to the public.
Rather than focusing on the software itself to generate revenues, Red Hat has built an enviable business by selling enterprise clients on the services and solutions needed to implement that open source software on its machines. That mainly comes in the form of training, support and consulting. Competition in Red Hat’s market is fierce, but Red Hat’s growth hasn’t been meaningfully challenged in the last several years. Now that investors have become more comfortable with the firm’s unique business model, shares could gain some extra upward traction.
Financially, Red Hat’s model has paid off in spades. The firm carries around $1.4 billion in cash and investments on its balance sheet -- and no debt. In other words, around 16% of the company’s market capitalization is paid for in cold hard cash. That sort of liquidity should help Red Hat surmount any challenges that come its way in the short term.
We’re betting on shares this week.
With a global network of more than 445,000 agent locations in 200 countries, Western Union (WU) is the largest money transfer company in the world, taking around 20% of global market share. That huge geographic footprint constitutes a massive advantage -- and a deep economic moat -- for Western Union. If competitors aren’t as easily accessed, they’ll be passed over by consumers; after all, customers want to know that their recipients will be able to access the funds they’re sending.
That’s not to say that Western Union is without challenges. The global slowdown has threatened to take a bite of the firm’s business in the last few years. A massive chunk of WU’s transfer business comes from immigrants’ remittances back home -- with money tighter lately, shrinking remittances mean shrinking revenues for WU. As of yet, though, that argument has yet to actually bear out too materially in WU’s earnings.
Despite the seemingly apples-to-apples nature of the money transfer business, it’s not commoditized even when locations are factored out. Consumers are understandably risk-averse when it comes to transferring cash around, and staid names such as Western Union have a major advantage as a result.
For investors looking for financial exposure without the massive risks of the big banks, WU is a solid option 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, 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.