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5 Rocket Stocks to Buy in This Turbulent Market - 24258 views
BALTIMORE (Stockpickr) -- Volatility is back in play this week as August reaches its halfway point. Already, the S&P 500 has shed nearly 9% this month, on the heels of one of the biggest corrections we’ve seen since 2008. While stocks have been pointed higher since the end of last week, investors shouldn’t get too comfortable. I said it last week, and I’ll say it again: The selling may not yet be over.
That doesn’t mean you should flee from stocks altogether right now -- after all, we’ve been finding market strength in August by following the Rocket Stocks.
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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 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.
It’s a strategy that’s been working out pretty well. In the last 116 weeks, Rocket Stocks have outperformed the S&P 500 by a very material 81.8%.
With that, here’s a look at this week’s Rocket Stocks.
Pharmaceutical firm Abbott Labs (ABT) isn’t your typical big pharma firm. Instead, this stock has exposure to other, equally attractive niches of the medical market and recurring revenue opportunities. Even though shares are mostly flat on the year, there’s significant upside potential left in this stock, and the fundamentals make it a strong name for this market.
Abbott generates around three-quarters of its sales from the pharmaceutical business, an industry that’s been under pressure as patent expirations and medical reform proposals threaten to derail profit margins. That said, Abbott is among the best-positioned to handle the transition thanks to limited looming expirations and a mature pipeline of potentially lucrative names.
Financially, Abbott is looking good right now. The company generates significant cash flows, money that largely makes its way to shareholders in the form of a dividend. With a 3.87% yield right now, this stock is looking cheap. We’re betting on a solid fundamental backstop in Abbott to mitigate any more selling this week.
United Parcel Service
Even though United Parcel Service (UPS) has had a slumping share price in 2011, investors shouldn’t discount this stock just yet. In many ways, a bet on UPS is a bet on the broader global economy; as the economy grows, so too does the volume of shipments that this delivery company handles. So it should come as no surprise that investors aren’t piling into UPS right now.
That said, selling is overblown in this stock; with analyst sentiment on the upswing this week, now’s a good chance to get into shares.
UPS boasts the largest shipping network in the world, delivering more than 15 million packages each day. Network means everything in the shipping business, and competitors need to be able to ship to a large set of locations and at an incredibly low cost. Essentially, that makes UPS’ current operations incredibly difficult to replicate, both logistically and from a capital perspective -- running a worldwide delivery network isn’t cheap.
But this stock is. A forward P/E of 13 and dividend yield of 3.19% are evidence of that.
UPS is one of TheStreet Ratings' top-rated freight services and logistics stocks.
Medco Health Solutions
Medco Health Solutions (MHS) is a $20 billion pharmacy benefit manager, a firm that administers and fills nearly a billion prescriptions each year. In all, Medco provides pharmacy services to nearly one in five Americans -- an absolutely massive chunk of the population to count as your customers. And it could be about to get bigger.
That’s because Medco is in the process of merging with long-time partner Express Scripts (ESRX) in a deal that’s currently awaiting approval. The merger would mark a major shift for both companies, but in this current market, I don’t think it’s being adequately accounted for by investors.
Neither does Wall Street; rising analyst expectations suggest that shares could be in demand from an institutional side in August.
Medco has been adept at boosting its margins by encouraging its customers to opt for generics (a practice that, when too aggressive, has gotten the company in trouble in the past). At the same time, Medco’s massive scale has afforded the company costs that few can meet, resulting in huge revenue growth in the trailing five years.
Investors should keep their eyes glued to Medco’s merger news. While a pre-merger play in contention does carry some added risks, the payoff may be well worth it.
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With nearly 4,700 stores spread throughout the U.S. and Mexico, AutoZone (AZO) weighs in as the largest auto parts retailer in the world. That means that the firm is able to capture a meaningful chunk of the $200 billion auto parts market -- a chunk that’s been growing over the past five years. That growth has come in spite of (or maybe because of) the recessionary headwinds that have challenged other retail peers over the same period.
AutoZone’s business is primed to do well in a recessionary environment, however. When consumers don’t have the cash to make new car purchases, they opt to hold onto their current vehicles longer, and the added maintenance costs go to retailers such as AutoZone.
The firm’s customer base isn’t relegated to consumers -- AutoZone also has a commercial parts business, which means that the company generates revenues whether owners of the aging North American auto fleet are do-it-yourselfers or opt to visit the local garage.
Not surprisingly, then, AutoZone has done better than most stocks in 2011. Shares are up nearly 6% on the year, besting the S&P 500 by double digits. With expansion into higher-growth markets (such as Mexico) well underway, this firm should continue to see positive growth in 2011.
AutoZone’s edge over the S&P could have a lot further to go this year.
Even AutoZone’s price performance looks pale compared to that of Dollar Tree (DLTR), though. Shares of the deep-discount retailer have rallied more than 19% this year as recessionary headwinds enticed consumers to trade down to DLTR’s offerings. With more than 4,000 stores, Dollar Tree is the largest “dollar store” concept in the country.
In a business where cost is really everything, Dollar Tree shines. The firm generates margins that ring in consistently near 7%, high for any retailer but particularly high for a deep-discount name such as Dollar Tree. Since the start of the recession, competition has been slowly encroaching from other discount and big-box retail names (such as Wal-Mart (WMT) and Target (TGT)), making Wall Street a bit too gun-shy about DLTR’s growth prospects. But it’s actually Dollar Tree’s push into competitors’ price points that make the stock most attractive right now.
DLTR has been building out non-dollar concepts in the last few years, a move that should do well for margins and could be particularly critical if inflation gets as high as some analysts predict in 2011. As long as uncertainty rules the markets, Dollar Tree should be a relative bastion of safety for investors.
Dollar Tree is one of TheStreet Ratings' top-rated multiline retail stocks.
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.