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5 Rocket Stocks to Buy Before They Blast Off - views
BALTIMORE (Stockpickr) -- Last week was "brutal" for U.S. stocks. The venerable S&P 500 fell a whopping 1.07%, the worst five trading sessions since the correction at the start of the summer. Ouch?
It may sound like a joke, but a 1% weekly drop has really been that rare this summer. And now, as earnings season draws to a close, Mr. Market is firing on all cylinders.
Despite last week's pullback in equities, stocks are still excruciatingly close to the all-time highs that got set at the start of the month. Indeed, it's far too early to start thinking about a top here. And that's exactly why it makes sense to take a look at five new Rocket Stock names 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. In the last 211 weeks, our weekly list of five plays has outperformed the S&P 500 by 82.4%.
Without further ado, here's a look at this week's Rocket Stocks.
Apple (AAPL), a Rocket Stock? Yes, you read it right. Despite a 15% drop in this stock's share price year-to-date, Apple is some huge upside potential ahead of it.
Right now, one of Apple's biggest catalysts comes on Sept. 10, when the firm is expected to announce a new iPhone (or iPhones) as well as a long-awaited TV. But no matter how Apple's media day ends up next month, this stock is dirt-cheap right now.
As I write, Apple sports a price-to-earnings ratio of just 11-- a tiny multiple that reflects investors' belief that the firm can't continue the breakneck growth it's achieved in recent years. But back Apple's mammoth cash position out of the equation, and Apple's P/E drops flat to 7. That's a lower cash-adjusted P/E than just about any other company in the tech sector. Apple boasts product attributes that should make it trade at a premium, not a discount: It's the only remaining PC maker that actually earns meaningful margins, it's the incumbent smart phone and tablet maker, and it owns the biggest music, video, and app ecosystem in the world.
Clearly, Apple's price is out of sync with the market now. To counter that, management has been working to provide shareholder returns of their own in the form of dividends and share buybacks. Because of the material size of Apple's cash position, those payouts could significantly concentrate Apple's shareholder base in the next few years.
AAPL is testing a long-standing resistance level. If shares clear resistance this summer, it could be the end of the downtrend.
2013 hasn't exactly been a banner year for shares of Vale (VALE) either. Since the calendar flipped to January, the Brazilian mining firm has shed more than a quarter of its market cap, a downtrend that only got broken late this summer thanks in large part to strong second-quarter numbers released last week. Vale is the largest iron ore miner in the world, with more than 300 million metric tons of the metal coming from its mines annually. Vale also produces coal and metals such as nickel and copper.
Vale's fortunes are tied in lock-step with commodity prices: when hard commodities are skyrocketing, so too are Vale's margins. But this year, softening demand for iron has sent investors fleeing from any name with excessive commodity exposure. A low cost structure should help to diffuse the risks at play here. In general, VALE's mines produce higher-quality ore, a fact that gives the firm claim to higher selling prices and better production efficiency. That helps to offset some of the costs in shipping its metals all over the world.
Ultimately, iron is an extremely cyclical business. But the good news is that warming economic engines around the world in 2013 should parlay into a cautious ramp-up in demand for iron ore. With rising analyst sentiment building in shares this week, we're betting on VALE.
Bank of America
Bank of America (BAC) has been a stranger to our Rocket Stocks list for the past several years -- and for good reason. The risk-reward tradeoff in the country's biggest banks haven't looked all that appealing for a while now. After all, regional banking names offer similar exposure with bigger dividend payouts and fatter margins, while avoiding the headline risk inherited from problematic acquisitions made in the heat of the financial crisis.
But BofA is starting to look attractive again.
One of the biggest reasons for BAC's sudden attractiveness is the fact that it's already taken the kicks in the teeth that came with writing off billion of dollars in debts and shaking the skeletons out of its labyrinthine balance sheet. Investors today get to jump in to a firm that's already done most of the hard work. The Fed continues to be a major boon for the banking sector. As long as money remains effectively free, BAC is able to earn hefty margins, especially now that mortgage rates are becoming upwardly mobile again. While we're not headed for another high-rate environment anytime in the foreseeable future, banks still don't need high rates to earn high returns.
Lots of regulatory eyes on BofA means that the firm won't be allowed to repeat its mistakes of the past anytime soon. While it also means that shareholder returns will be an afterthought for regulators, BAC has plenty of internal investment options as it rebuilds its coffers. And with a strong investment business in play right now, a rising market tide should continue to lift shares of Bank of America in 2013.
Strong housing data has provided a shot in the arm for Home Depot's (HD) performance in 2013, spurring shares close to 30% year-to-date. Home Depot is the world's largest home improvement retailer, with around $75 billion in annual sales. The firm boasts a network of 2,250 stores spread across the world -- albeit primarily in the U.S. and Canada.
As consumers adjust to a housing market that isn't going up and away, Home Depot provides an alternative way to built equity and upgrade. Homeowners' natural interest in their biggest lifetime investment provides a truly captive audience for home improvement stores, and HD's big box model works exceedingly well as converting that audience into paying customers.
That doesn't mean that Home Depot hasn't made mistakes -- oh, has it ever. The firm nearly sunk itself by leveraging its way to too many stores in 2008, and its more recent entry into China turned out to be a flop. What's more important, however, is the fact that management has been adept at righting the ship each time the firm hits the rocks. Calculated risks should continue to yield palpable profits in 2013.
A decade ago, BlackBerry (BBRY) owned the smartphone business. Back then, the idea that anyone else would sell more-Web-connected devices was unthinkable -- especially in the enterprise arena that BlackBerry dominated. Today, the only thing that's unthinkable is the notion that BBRY could regain its throne. But this comeback kid is still a Rocket Stock name worth watching this week.
Put simply, desktop computer firms out-innovated BlackBerry when they transitioned their software and hardware into the mobile world. Clearly, the consumer trickle-down model works: sell a sexy handset to consumers, and it'll work its way into the enterprise arena, replete with administrator-level control. Now BlackBerry is working hard to court consumers again instead of IT managers. The stakes are high in the handset game -- and it's in carriers' best interest to push BlackBerry's products to avoid too much pricing power from Apple's iOS and Google's (GOOG) Android phones.
BlackBerry's model is equally attractive. By selling service subscriptions (typically through carriers), it's able to book recurring revenues that have gone a long way in keeping the firm afloat despite lackluster handset sales. Important new offerings like the BB10 operating system and new phones could help get BBRY back on track. I doubt very much that BlackBerry will regain its throne -- but it doesn't need to in order to deliver substantial shareholder returns. With around $6 per share in cash on its balance sheet and zero debt, BBRY is better positioned than 90% of Wall Street gives them credit for.
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, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji
Follow Jonas on Twitter @JonasElmerraji