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5 Rocket Stocks to Buy in October - 17378 views
BALTIMORE (Stockpickr) --Today’s the first trading day of October. That means we’re starting both a new trading month and quarter today -- an opportunity for investors to reset their mental clocks as they gauge short-term performance. From a psychological standpoint, that reset could have an important bearing on investors’ risk appetite.
The start of the fourth quarter is important for another reason too.
Historically, the fourth quarter is one of the best-performing periods for stocks, accounting for nearly half of the market’s average annual gains. Obviously, that seasonality is far from guaranteed any year – especially when black clouds are looming overhead. Even so, it’s a statistic worth considering as we enter the fourth quarter of 2011.
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Of course, if you’re looking for performance, Rocket Stocks have historically been a good choice as well. In the last 123 weeks, our weekly list of five names has outperformed the S&P 500 by 85.1%. This week, we’ll aim to continue beating the market with another set of stocks.
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.
With that, here’s a look at this week’s Rocket Stocks.
It’s been a tough year for regional banking stock BB&T (BBT). So far, shares of this best-in-breed regional bank have dropped by 18% in 2011, dragged lower by the poor performance in the rest of the financial sector. But that decline in share price has been mostly unwarranted -- BB&T has little in common with its larger competitors. Instead, this $15 billion bank was one of the more conservative large banks heading into the financial crisis, and one of the most financially stable on the way out.
Through it all, BB&T’s focus has remained on the retail banking business. Attention to building its deposit base meant that BB&T has a direct line to cheap capital -- and comparatively conservative underwriting standards mean that the bank’s loan book was less riddled with garbage than the rest of the industry was. Those two factors helped BB&T maintain profitability throughout the financial crisis.
Like many of its regional banking peers, BB&T was able to buy distressed bank assets at bargain prices from the FDIC during the crisis, a move that should turn out prescient for the firm’s long-term growth strategy. In the longer-term, added focus on building its fee-based business is probably the most enticing path to growth for BB&T. Until then, double-digit margins (characteristic of regional banking peers) and a hefty 3% dividend yield are two near-term reasons to be a believer in this bank.
Pharmaceutical and medical supply distributor Cardinal Health (CAH) has managed to eke out 9% gains on the year, performance that outpaces the rest of the healthcare sector by almost 16%. That relative strength makes Cardinal a stock worth watching in the fourth quarter -- even if the firm’s grip on its customers’ does carry a bit of uncertainty.
Cardinal’s business centers on distributing drugs and medical instruments to pharmacies and hospitals, acting as a middleman between pharmaceutical and device makers and caregivers. When a retail pharmacy needs inventory, it turns to Cardinal’s network to get warehoused and repackaged drugs -- sparing either of the other parties from needing expertise in those tasks. Still, almost half of Cardinal’s revenue comes from CVS Caremark (CVS) and Walgreen (WAG), concentration that could be a major problem if either firm decides that it wants to trim costs by entering the distribution business itself.
One of Cardinal’s biggest defenses is the fact that distribution isn’t a particularly profitable business -- the firm is successful only because of the high volumes that it carries. That should protect Cardinal from getting squeezed out of the equation, at least until the firm finds a more lucrative income stream. Detractors aside, analyst sentiment is on the upswing on Cardinal, so we’re betting on shares this week.
Whole Foods Market
Whole Foods Market (WFM) is the largest organic and natural food supermarket chain in the US. The firm’s 300 stores aren’t relegated stateside, however: locations include Canada and the UK as well. In the last three decades, Whole Foods has carved out a highly profitable niche as a high-end grocery store, riding a major consumer trend for healthy organics and other higher-margin foods.
That niche got rocked during the financial crisis as many consumers tightened their purse strings and traded down to conventional grocery stores. To combat customer attrition, Whole Foods has had to try to attract more mass-affluent shoppers by lowering its prices and hitting more of a middle ground in the quality spectrum. Those efforts have been well received by WFM’s customer base, and the firm has returned to record sales and profitability in its most recent fiscal year.
Because Whole Foods positions itself as a higher-end grocery store, its profitability is on the high end of the spectrum. Net margins rang in at 3.69% in the latest quarter, more than twice the margins seen at peers like Safeway (SWY) and Kroger (KR). While that positioning makes the firm more susceptible to a double-dip recession, Whole Foods has already proven much more resilient than Wall Street expected.
Whole Foods is one of TheStreet Ratings' top-rated food and staples stocks.
Another retail name that’s seeing rising sentiment this week is apparel name Limited Brands (LTD). Limited is the firm behind mall staples such as Victoria’s Secret, Bath & Body Works, and White Barn Candle Co. -- all told sporting more than 3,000 locations for its portfolio of retail stores.
Brand power means everything to Limited. Because its exclusive merchandise is the sole draw for its stores, it’s crucial that Limited continue to build up its recognition, particularly as consumer spending starts to soften this fall. The firm’s huge store footprint is another challenge it’ll have to face; with stores already set up in nearly every mall in the country, saturation is the biggest constraining factor on top-line growth. To combat that, Limited is going to have to look abroad; the strength of its brands may well make that an easier task than most investors anticipate.
Limited hasn’t been shy about trimming the fat, opting to unload its namesake Limited Stores brand in 2007 to boost the firm’s overall profitability. That unemotional approach to retail should serve the firm well as it tries to approach growth abroad.
Food maker J.M. Smucker (SJM) is another firm that’s seen success on the back of its brands; the $8 billion food company owns names like Smucker's, Jif, Folgers and Pillsbury, names that are no stranger to most American pantries. The abundance of popular names in Smucker’s lineup is one reason for its success amid the rising input costs that have been squeezing peers’ margins. Because Smucker has more pricing power than most, the firm has been able to keep its net margins consistently around 10%.
That means that Smucker is approximately twice as profitable as the average publicly traded food processing firm.
Smucker has also been attractive to investors who are seeking income right now. The firm’s consistent earnings provide investors with a 2.63% dividend yield that’s frequently increased by management. While that yield isn’t a massive income-generator for most, timing is worth considering -- for investors who picked up shares just a little over a year ago, the cost yield is actually approaching 4%. For us, rising analyst sentiment indicated by our screen is reason enough to pick up shares 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.