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5 Rocket Stocks to Buy in May - views
BALTIMORE (Stockpickr) -- With the first trading day of the new month just around the corner, should you just “sell in May and go away”?
Following that popular mantra would have worked out well for investors last year, sparing stock investors from some of the most painful drawdowns Mr. Market had seen since 2008. The success of selling in May and going away might tempt some investors to follow that clichéd advice again this year, but it’s important to remember that this isn’t 2011.
This time last year, there were a slew of structural factors that were hampering stocks from moving higher. Both technically and fundamentally, things didn’t look as strong as they do now. A combination of record corporate earnings and paltry stock price increases mean that, broadly, stocks are cheap right now. Even though Europe has some big black clouds overhead, investors seem to be taking volatility from the EU in stride better than before.
So instead of selling in May and then going away, we’ll focus instead on five new Rocket Stocks worth buying this month.
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 149 weeks, our weekly list of five plays has outperformed the S&P 500 by 80.34%.
With that, here’s a look at this week’s Rocket Stocks.
It’s been a stellar year for shareholders of American Express (AXP); shares of the $70 billion charge card stock have rallied by more than 27% so far in 2012. While the firm’s network doesn’t have the same network size as other payment networks such as Visa (V) or MasterCard (MA), that’s not the point. Instead, Amex operates in a highly profitable niche that gives it some distinct advantages over rivals.
Even though Amex has fewer customers than Visa or MasterCard, Amex’s cardholders spend more money. That translates into higher revenues for American Express. And because AXP charges merchants dramatically higher rates to accept payments than other card networks, Amex sports thick net margins.
Amex is almost entirely a closed-loop network; one result of that is the fact that the firm does expose itself to lending risks, something that scared investors after bad debt losses in 2008. Increased focus on charge card products and opening the Amex brand to other issuers should help to reduce those risks in the next few years.
Because American Express has historically targeted higher net worth clients (with higher creditworthiness), it’s built a valuable brand and driven bigger profits from each individual cardholder. The firm would do well to keep that fact in mind as it turns an eye to expansion. Harnessing more consumer spending in emerging markets looks like a major growth catalyst in the years ahead.
Another financial name that’s making our Rocket Stocks list this week is U.S. Bancorp (USB). At close to $62 billion in market value and a footprint that reaches 25 states, U.S. Bancorp is one of the biggest regional banking names in the country -- that’s a classification that puts USB in good company as investor uncertainty ramps up for traditional Wall Street banks.
U.S. Bancorp has some major advantages stemming from its fee-based businesses. While other banks rely almost exclusively on lending (and risk exposure) to generate revenues, U.S. Bancorp generates service revenues from its credit card, wealth management, and payment processing units. Fee-based revenues are generally recurring, and they tend to court stickier customers than traditional banking operations could hope to. Today, fee revenues make up a double-digit percentage of USB’s total revenues.
That means that traditional banking still makes up the lion’s share of USB’s revenue stream. Because the firm has access to cheap deposits from customers, it’s able to lend money more cheaply than many rivals -- and it sports net margins in the 25% range as a result. That attractive positioning should continue into the second half of 2012.
Yahoo! (YHOO) has had a pretty volatile year. From conspicuous management ousters to torpedoed acquisition rumors, shareholders have certainly seen the ups and downs of their holdings over the last 12 months. But now, the focus is turning back on Yahoo!’s core business: a phenomenally popular collection of Web sites.
Yahoo! owns some of the most-visited sites on the internet, making it one of the few legacy tech bubble destinations that’s held its spot on the rankings. Like other search providers, Yahoo!’s main business is advertising.
But Yahoo! isn’t a search company anymore -- today, it only provides the search portal; Microsoft (MSFT) maintains the algorithms that run Yahoo! Search. That’s a good sign that YHOO has embraced its role as a destination over developing search technology. Ultimately, Yahoo! gets paid for having more eyes on its websites, not for reinventing the wheel with its search technology.
At the same time, Yahoo! has made some prescient investments into attractive businesses. The most well known is the firm’s 43% stake in Alibaba Group, a Chinese technology giant. Unloading Yahoo!’s share in Alibaba would shift a material chunk of YHOO’s assets into cash and reduce risk -- it’s a good move now that the company has seen its share of Alibaba balloon in value.
With analyst sentiment on the upswing for Yahoo, we’re betting on shares.
Yahoo! shows up on a recent list of 5 Companies With New CEOs to Avoid.
Video game giant Activision Blizzard (ATVI) is best known for its attractive portfolio of franchise titles: Call of Duty, World of Warcraft, and Diablo are just a few of the firm’s ATVI’s brands. It would be one thing of Activision Blizzard merely released blockbuster games, but the company doesn’t do that. Instead, its most popular franchises feature a service component, like the subscription fees that the game’s 10 million subscribers pay each month.
That subscription component provides ATVI with recurring, high margin revenues. And they’re sticky too. Because gamers have a massive sunk cost in building characters and attaining status, they’re a lot less likely to switch to a competing franchise and restart the process. ATVI’s introduction of a service component into the hugely popular Call of Duty franchise with Call of Duty Elite shows that the firm is working to replicate that model beyond MMORPG titles.
A debt-free balance sheet and significant cash balance should provide the wherewithal to fuel the firm’s next wildly popular franchise. In the meantime, investors should keep an eye out for first quarter earnings on May 9.
We’re bringing up the back of our Rocket Stocks list this week with a defensive name: Republic Services (RSG). Trash is cash for Republic -- the firm is the second largest waste management firm in the country, moving around 50 million tons of garbage through its network each year and boasting business in 39 states through 343 smaller collection companies.
Traditionally, waste management is thought of as a recession-proof business; after all, people still need to throw stuff away when the economy turns lower. In reality, recession-proof isn’t really the right word -- when disposal costs get too high, consumers will turn to alternative means of getting rid of garbage. But Republic Services’ business is very recession-resistant, and if the firm can continue to reign in its costs, it’s likely to remain that way.
Like any good defensive name, Republic throws off lots of cash from its operations. For investors, that equates to an impressive 3.26% dividend yield at current price levels. Although RSG got hit hard in Friday’s trading session thanks to trimmed full-year guidance, there’s still a lot of possible upside in this stock. Shares could get a much-needed bounce 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.