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5 Rocket Stocks to Buy as Spain Gets Bailed Out - views
BALTIMORE (Stockpickr) -- Phew. Just when market conditions were getting unbearable again, investors got their biggest single-day gains of the year on Wednesday. And you can bet that plenty of investors who were early to hit the “panic button” will be looking to make up for their lost ground this week.
Mr. Market gave back all of the previous week’s losses and more last week, the S&P 500 climbing 3.73% between Monday’s open and Friday’s close. Wednesday’s 2.3% climb in the S&P was a big part of those returns. This week, stocks are pointed higher thanks to a bailout of Spanish banks that should add some significant comfort to investors who’ve been tossed around all too much lately.
The eurozone debt crisis has been the biggest factor affecting U.S. stocks for months now, as exposure to the continent across the pond and global monetary relationships caused markets here at home to react violently to the troubles over there. The $125 billion bailout of Spanish banks should help to ease things over there, especially if Greece gets some additional easing of their own.
We’re already seeing a pretty significant bounce in international stock markets this morning. The best way to take advantage of this buying streak is by looking at a new set of “Rocket Stock” names today.
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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 154 weeks, our weekly list of five plays has outperformed the S&P 500 by 82.64%.
With that, here’s a look at this week’s Rocket Stocks.
Speaking of banks, the first name on this week’s Rocket Stocks list is Canadian banking giant Toronto-Dominion Bank (TD), the second biggest bank in our neighbor to the North, and a major presence here in the U.S. TD serves more than 20 million customers, primarily in North America, through retail and commercial banking businesses.
Income-hungry investors take note: TD currently pays out a 3.7%, a hefty payout when compared to similar-sized U.S. banks.
Part of that big yield comes from the margins that Toronto-Dominion is able to crank out each quarter. The firm earns net margins approaching 30%, the types of earnings that you’d expect to see from a smaller regional bank, not the second-biggest banking stock in Canada. A couple of big reasons for those margins are a higher quality loan book than American peers and a focus on the core retail banking business leading up to the “great recession” of 2007 and 2008.
With Canadian banking slowing down, the firm has been ramping up its exposure to the more volatile U.S. banking market to find growth in recent years. While that contributes risk to TD, it also adds considerable rewards to the firm’s income statement. With rising analyst sentiment in this bank right now, we’re betting on shares.
Chemical giant DuPont (DD) has its hands in everything from agriculture, to safety products, to coatings and electronics. That varied portfolio of businesses means that DuPont is able to spread its earnings across a number of dissimilar sources, reducing the cyclical nature of what’s always been a cyclical business.
Agriculture has been one area where DuPont has invested significant resources in the last few years, building up its genetically modified seed business and becoming one of the key suppliers of crop seeds in the world. In turn, that’s helped to fuel double-digit margins in the bottom line, and top-line numbers that have eclipsed pre-recession revenues in each of the last two years.
Corporate culture is key at DuPont, where management is willing to forego near-term success in favor of longer-term profits. That investment-centric approach has yielded brands such as Kevlar, Teflon, and Tyvek, which continue to drive massive amounts of revenues for this well-established blue chip.
Like TD, DuPont is a solid high-yield name with a payout that’s around 3.5%. Income seekers shouldn’t ignore this Rocket Stock in June. (I also featured DuPont in April in "7 Dividend Stocks That Want to Pay You More Money.")
AutoZone (AZO) has had a strong year in 2012, rallying more than 18% on the year on the strength of aftermarket car part sales. The average car in the U.S. has never been older than it is now, a fact that’s driving part sales as car owners try to spread their high ownership costs over a longer period before biting the bullet and buying a new vehicle.
With a network of more than 4,500 stores in the U.S. and close to 300 in Mexico, AZO is well positioned to take advantage of that trend.
AutoZone also runs a lucrative commercial business, which provides parts to repair shops and service stations. While the margins aren’t as deep for the commercial part supply business, the volumes are, and they enable AZO to take advantage of repair trends that extend beyond the do-it-yourselfers who stroll into one of the firm’s stores.
The growth of the Mexico business has been attractive since AutoZone entered the market there. It could spawn locations in other countries as well in the future as AZO searches out growth in emerging markets where cars are critical and the average fleet age is old.
In the meantime, that fleet age, combined with current economic headwinds, should help boost AutoZone’s performance in the second half of 2012.
If you use credit of any sort, Equifax (EFX) knows about you. The $5.6 billion firm is one of the big three credit bureaus, firms responsible for keeping track of your credit history and selling that data to your lenders to help manage risks. Because of the concentrated nature of the credit monitoring business and extremely high barriers to entry, Equifax has a huge competitive advantage right now.
Because most lenders pull credit reports from multiple providers, Equifax and its peers typically have huge overlap in their customer lists. And since credit report pulls don’t make up a huge chunk of the costs of lending, there’s little incentive on the part of banks to reduce their reporting to just one firm. In fact, the risk-reward tradeoff is much more attractive for those who opt to source creditworthiness data from all three bureaus.
Emerging markets and analytical tools are two areas where EFX has big growth potential. The firm’s business in the U.S. is mature, and hamstrung by consumers’ avoidance of credit right now; if EFX can get a foothold in an emerging economy where new consumers are using credit, it should be able to expand its margins.
At the same time, EFX’s customers are looking for new and unique ways to measure and reduce risk. Analytical tools such as the Decision 360 platform should keep customers hooked on Equifax for their credit data needs.
Brinker International (EAT) owns or franchises more than 1,500 casual dining restaurants spread across the globe under the Chili’s, Maggiano’s Little Italy banners. The vast majority of Brinker’s locations are Chili’s restaurants, but upscale Maggiano’s is the more lucrative of the two -- the average check is approximately twice as high as you’d see at Chili’s.
As casual dining gains some demand in 2012, that should provide an opportunity to build out the brand more.
Brinker dramatically changed its operations in the last few years, selling off most of its restaurant brands in the wake of the recession. While reducing exposure to chains most threatened by the recession was wise, the timing was less than perfect and left Brinker with its flagship Chili’s restaurants on the lower end of the price scale and a bigger-ticket chain in Maggiano’s that lacks the geographic footprint at this point to make a more material impact on sales. With competition still fierce in the casual dining space, Brinker may see its margins get even more squeezed as a result.
International expansion looks like one of the biggest growth avenues for Brinker and the Chili’s brand. The firm already has an admirable international footprint right now -- but there’s still plenty of room for the firm to boost its operations in places where a burgeoning middle class population is looking for American-style restaurant options. We’re betting on shares of EAT 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.