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BALTIMORE (Stockpickr) -- Mr. Market closed on a high note last week, the S&P 500 ending Friday at a fresh 52-week high after the big index plowed 2.23% higher than Tuesday’s open. So much for a quiet short week after Labor Day.
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In the meantime, fall officially starts at the end of next week, which means that the investment narrative is due to change. Expect the election and the “Fiscal Cliff” to start becoming a bigger part of the conversation, but don’t get too sidetracked by it; the big story is still the fact that the S&P is trucking its way though a prodigious well-definied rally right now.
That’s why we’re turning to a new set of Rocket Stocks worth buying 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.
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In the last 167 weeks, our weekly list of five plays has outperformed the S&P 500 by 78.05%.
Without further ado, here’s a look at this week’s Rocket Stocks.
Construction and aerospace conglomerate United Technologies (UTX) is first on our list this week. The $72 billion firm owns league-leading brands such as Carrier air conditioners, Sikorsky helicopters, and Pratt & Whitney jet engines.
While the products that roll off of UTX’s factory lines are certainly big-ticket and capital intense, the firm has been able to avoid the downside of the business cycle -- particularly with interest rates at historic lows.
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Selling big-ticket items also comes with some attractive side effects. For example, maintenance for jet engines and elevators is highly regulated, driving significant aftermarket sales for UTX as wear parts get replaced at premium prices. The acquisition of Goodrich this summer skews UTX’s focus more toward aviation, but it’s a business that should be extremely complementary to the firm’s existing aerospace operations.
The purchase wasn’t cheap, and UTX will take some time getting its balance sheet back in shape. Regardless, the consolidation should be especially attractive once the firm finds its cost savings.
United Technologies has a long track record of being a good steward for investors’ money. The firm has historically returned more than 70% of free cash to investors in the form of dividends and share repurchases, two tools that management can use to directly return value to its owners. Expect UTX’s growth trajectory to keep throwing off cash right now.
So far, 2012 has been a good year for shareholders of Accenture (ACN). The $44 billion consulting firm has rallied more than 21% since the first trading session of the year, besting the broad market by a big margin.
Accenture is a consulting, technology, and outsourcing firm that provides service to 96 of the world’s 100 biggest companies, boasting a geographic footprint that spans 50 countries. That global reach among the biggest firms is a very good thing for Accenture; after all, courting consulting contracts is often a case of who you know. Potential clients know that Accenture knows everyone.
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Accenture’s business is built around helping clients make more money. That’s critical. Because ACN quantifies the improvements that it brings to the table at each engagement, it’s more likely to continue to renew its contracts, even when firms are tightening their belts.
And unlike many consulting firms, which are formed as lucrative partnerships, Accenture’s publicly traded status means that it throws off mountains of cash with effectively no debt. The downside of that cash pile -- $5.6 billion at last count -- is that it may prove temping for management to put to work with a risky investment (like a series of goodwill-filled, asset-light acquisitions).
A historically decent dividend payout should help the firm avoid that compulsion.
Baxter International (BAX) is one of the biggest firms in the injectable therapies business, manufacturing everything from IV bags and solutions to dialysis equipment. In short, if it involves a needle, Baxter is probably involved somewhere in the supply chain -- or it would be if the business looked lucrative enough.
Baxter isn’t interested in many of the broad injectables that other pharmaceutical and medical device firms focus on. Instead, the firm’s niche positioning has paved the road to exemplary profitability by keeping Baxter’s eye on disorders like hemophilia.
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Baxter’s BioScience segment has been successful at innovating its way to bigger revenues over the last several decades, even if that strategy comes with higher risks than a more reactionary pharma firm takes on. After all, with higher risks come higher rewards.
While the firm’s pharma arm is focused on niche offerings, its medical device segment is more interested in being a generalist. The firm supplies consumables as well as some more specialized devices (dialysis machines, for instance) to patients and healthcare facilities around the world. Those businesses don’t have the same moat as its therapies do, but they provide a more consistent recurring revenue stream for investors.
With rising analyst sentiment in BAX this week, we’re betting on shares.
When most people think of H.J. Heinz (HNZ), they think of ketchup. But there’s a lot more to Heinz’s business than that.
Even though the popular “57 varieties” tag line created by Henry Heinz in 1896 was basically made up at the time, the firm boasts a massive product portfolio today. Besides its namesake brand, Heinz also produces everything from soup and baby food to Ore-Ida frozen French fries.
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I’m not trying to downplay the importance of condiments to the Pittsburgh-based firm: Heinz brand accounts for approximately 40% of the firm’s total sales, with restaurants contributing around 15% to HZN’s top line. While rising input costs have been a challenge for Heinz in the last couple of years, the firm has done a commendable job of keeping its net margins around that double-digit mark. Going forward a pullback in soft commodity prices should help improve profitability.
Close to two-thirds of Heinz’s sales come from abroad right now. While that’s been a detractor because of the strength of the dollar as a flight-to-quality asset, Heinz’s international positioning is a positive that should ultimately have some tailwinds as other currencies start to pick up strength.
In the meantime, the firm’s dollar-denominated 3.7% dividend yield should keep investors interested in shares.
Expedia (EXPE) boasts the impressive title of being the world’s biggest travel agent. The firm sells reservations to more than 145,000 hotels, hundreds of airlines, and scores of rental car agencies, cruise lines, and excursions. That network has produced a customer base that keeps coming back -- a very good thing in the increasingly competitive online travel industry.
Today, travel sites often offer “lowest price” guarantees, claims that they can make because they effectively all offer the lowest price for a given hotel or airline ticket. While that’s lowered costs of travel and increased the popularity of online travel bookings, it’s also commoditized the industry. As rivals vie for a share of a market that’s already spoken for, Expedia’s early successes at courting consumers should keep it in the top slot.
Meanwhile, it’s working hard to replicate its successes abroad. Today, international markets make up more than a third of EXPE’s total bookings, a big enough chunk to materially reduce the firm’s exposure to the cyclical U.S. travel business, but a small enough chunk that it hasn’t been overly hurt by a strong dollar.
Relative strength has been stellar for this stock of late, and with analyst sentiment still on the rise, we’re betting on shares.
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.