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BALTIMORE (Stockpickr) -- It may be a short week, but that’s no reason to think that Mr. Market will be short on drama as we approach the Thanksgiving holiday. With Congress’ Super Committee not looking so "super" ahead of its Wednesday deadline, new sparks in the Middle East and the all-too-familiar eurozone debt debacle, there are plenty of market-moving headlines to watch out for this week.
And with many traders thinking Turkey rather than tactics, low volume could mean more volatility for stocks. This week, we’ll attempt to harness the swings with a new set of five Rocket Stock names.
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 129 weeks, our weekly list of five plays has outperformed the S&P 500 by 78.04%. That gives us plenty to be thankful for, even with Turkey Day still a few trading sessions away.
With that, here’s a look at this week’s Rocket Stocks.
I last talked about regional banking firm U.S. Bancorp (USB) back in October, when I called the firm one of four banks you should still buy in this market. Now this bank is leading off our Rocket Stock list.
U.S. Bancorp’s (USB) regional bank status doesn’t really do it justice. With a $48 billion market cap, USB is one of the biggest banks in the country. It’s also one of the most compelling, skirting most of the problems faced by the legacy banking names during the recession, and growing its asset base as it acquired distressed competitors from the FDIC.
One reason for USB’s success is its revenue stream. Almost half of the firm’s revenue comes from asset management and payment processing fees, which means that USB is significantly less dependent on its loan book to generate returns than its peers are. Not only do the company’s fee-based businesses perform well when rates are low (as they are now), they also tend to be recurring. That’s one reason for the 26% net margins that U.S. Bancorp was able to churn out last quarter.
That level of profitability has helped to support a 2% dividend yield, one of the highest in the banking industry. For investors looking for dividend exposure, USB is one of the most attractive options out there -- particularly with analyst sentiment on the rise this week.
Pharmaceutical and medical device distributor McKesson (MCK) has been having a solid year in 2011, beating the S&P 500 by double digits year-to-date. Part of that success has been thanks to growing scale -- as McKesson increases its distribution volume, its revenue increases in kind. But the business environment is still challenging for this firm.
As a distributor, McKesson acts as the middleman between pharmaceuticals or device makers and healthcare providers. That relationship means that the firm can effectively only generate paper-thin margins -- anything more provides too much of an incentive for their partners to cannibalize their distribution functions. Two trends are in McKesson’s favor, though: the bevy of patent dropoffs in the next few years (the firm generates deeper margins on generic drugs), and an aging population that’s requiring costlier healthcare.
Perhaps more attractive is McKesson’s IT arm, which currently only accounts for a small fraction of the firm’s sales, but offers heftier margins than the distribution business. If McKesson can increase its revenue mix toward healthcare IT, which is itself in a trend toward increased spending, shareholders should benefit.
It’s not surprising that shares of advertising and marketing firm Omnicom Group (OMC) have struggled in the last few years. Advertising costs have been under pressure since the start of the recession on soft demand, and as a result, ad agencies have seen their revenues drop as well. But longer-term, Omnicom is positioned to perform well.
The firm owns some of the most well known ad agencies in the business, firms that specialize in traditional advertising. That’s a big-dollar specialization that flourishes when times are good, and advertisers are looser with the purse strings on their advertising budgets. Because OMC owns a handful of “prestige” marketing brands, it’s able to attract business even when times get tough -- even if those projects come with lower price tags (and margins) right now.
Advertising is a business that’s driven by creative professionals. As a result, Omnicom’s ability to attract and retain talent is going to be paramount going forward -- the firm’s scale and access to public markets makes it better-suited than most to do that. We’re betting on shares this week as analyst sentiment ratchets higher.
VeriSign (VRSN) is one of the biggest internet infrastructure firms in the world, maintaining a central directory of all domains and many of the systems that run them. The company is essentially the gatekeeper to owning a .com Web address, and as a result, VeriSign is able to collect a fee for each of the more than 110 million domains that fall under its purview. By selling off its consumer security business to Symantec (SYMC) in 2010 and sticking with its core internet infrastructure business, VeriSign peeled away a less profitable division that carried significantly more risk to the firm’s brand than its core business.
That’s not to say that management is positioning VeriSign away from security. The firm still offers enterprise level security solutions designed to protect against firms against network attacks, but they’ve moved away from an intense, front-facing consumer business. Enterprise security should continue to be a booming market thanks to an increasing number of threats to corporate websites and networks.
VeriSign’s exclusive contracts with ICANN offer an attractive economic moat for the firm. Because increases in registration fees are built into those contracts, VeriSign will be able to generate attractive growth over the course of the next several years without needing to work for it. The fact that those contracts are up for renewal next year does pose some added risk for VRSN, but it’s likely they’ll see a renewal.
As of the most recently reported quarter, VeriSign shows up in Discovery Capital Management's portfolio.
As the second-largest auto parts retailer in the U.S., O’Reilly Automotive (ORLY) is a major player in the world’s largest car market. In total, O’Reilly’s footprint spans 3,700 stores spread across the country. That massive footprint is thanks in large part to O’Reilly’s 2008 acquisition of CSK Auto, a major auto parts retailer in the Western U.S.
The combined firm benefits from the best attributes of each brand. Where O’Reilly has been adept at nurturing its commercial business, CSK shined at its consumer sales business (CSK held the top spot in nearly 70% of its markets when it was acquired). Combined, both strategies have provided fast top-line growth in the last few years, and moved margins higher as O’Reilly’s overall economies of scale improved.
The story for auto parts retailers is a good one. The economic slowdown of the last few years has prompted many consumers to hold onto their vehicles longer, rather than overextend themselves by putting a new car in the garage. As the average car age in the U.S. stretches, the demand for auto parts (from headlights to head gaskets) will continue to climb. O’Reilly’s mix of DIY and commercial exposure presents a good case for growth in that scenario.
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.