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5 Rocket Stocks to Buy This Week - 9626 views
BALTIMORE (Stockpickr) --Stocks are pointed lower this morning, getting dragged down by the familiar concern of European debt -- namely a Greek default. It’s a repeat performance from the start of last week; then, European markets were reeling from the news that the Switzerland was capping the exchange rate of the franc.
Banks took the brunt of the selling across the pond -- and U.S. financials are doing the same thing here to start today’s trading session. Today’s direction is particularly concerning given the S&P 500’s proximity to a key technical support level just below 1120; with fundamentals already well out of synch with stocks, a technical breakdown would have seriously bearish implications for investors.
But that doesn’t mean that it’s time to throw in the towel just yet. To find upside opportunities, we’re turning to 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 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 typically follows.
It’s a strategy that’s been working out pretty well. In the last 120 weeks, Rocket Stocks have outperformed the S&P 500 by 83.8%. With that, here’s a look at this week’s Rocket Stocks.
While competition is fierce in the computer business, IBM (IBM) is about six years ahead of the competition. After all, that’s when the company decided to break off its personal computer business to focus on enterprise IT. In the years since, as computer manufacturing becomes increasingly commoditized, peers such as Hewlett-Packard (HPQ) have opted to unload their own consumer businesses. HP and peers just won’t be able to collect the premium that IBM got back in 2005.
If nothing else, six years without a personal computer arm has left IBM without the same kind of earnings drag seen by peers. The firm’s net margins currently ring in at around 14%, enough profitability to support a 1.9% dividend yield. The increased popularity of cloud computing is a positive trend for IBM. Because the company is at the forefront of helping enterprise customers build out their private cloud networks, the firm should see incremental increases in both hardware sales and service revenues in the next several quarters.
IBM has one of the most enviable product offerings in the IT sector –--and investors have taken full advantage in 2011. Shares of the company have rallied 10% year-to-date in spite of the selling that we’ve seen this summer. Rising analyst sentiment indicates that those returns could increase this year.
Biotech therapeutics firm Amgen (AMGN) specializes in treatments for renal diseases and cancer. The firm’s pipeline is robust, even if it faces the same patent drop-off concerns that most of its peers are facing right now. To counter the increase of generics of some of its most popular drugs, Amgen has been slashing costs -- a move that’s worked to curb margin squeeze and keep profitability at high levels.
Ultimately, that sort of fundamental patch-job isn’t sustainable, and Amgen is going to have to rely on new pipeline drugs to deliver earnings growth. The good news is that a few of Amgen’s up-and-coming offerings do have the potential to match previous successes. The company’s expertise at commercializing new technology (and jumping the hurdles of FDA approval) is a crucial factor in its continued success.
With analyst sentiment on the rise, we’re betting on shares this week.
Oil and gas producer Noble Energy (NBL) has understandably been under pressure in the last few months. As economic concerns led to a contraction in energy commodity prices, Noble and its competitors have seen their margins get eroded away as salable prices edge closer to production costs. Still, a lower-risk mix of projects should help keep Noble’s engines running in 2011.
Noble Energy has considerable exploration operations abroad, with projects that span from offshore rigs in the Gulf of Mexico to Equatorial Guinea and Israel. The decision to mix relatively low risk U.S. operations with more speculative explorations in other regions is an attractive attribute for Noble. So is the firm’s exposure to natural gas, a commodity that’s been under pressure in the last couple of years.
As oil prices rose, commodity investors had been starting to look to natural gas as a bullish trade given its ability to act as a somewhat elastic substitute for oil. While lowered demand hasn’t let that argument pan out, it’s only prolonging the time horizon on the trade. Even though oil’s been sold off lately, it’s still on the high side of historic prices. With around 60% of production coming in the form of gas, Noble’s prepared to capitalize on a rally in the commodity.
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Raytheon (RTN) has had a challenging year in 2011, falling more than 12% year-to-date as investors shed shares of names that they deemed riskier than peers. With hefty exposure to Department of Defense spending, Raytheon fits in that category. A budget under the knife puts Raytheon’s core business under increased analyst scrutiny right now. But concerns about this defense contractor could be overblown.
That’s because even though 88% of Raytheon’s sales come from the U.S. government, the company has been expanding overseas to find customers. Contracts with U.S. allies are helping to expand international sales growth at a double-digit annualized pace and should take away some of the downside risk that Wall Street has already priced in.
Like its larger peers, Raytheon has been working to build out its IT business to court other non-defense government agencies. Ultimately, the firm’s push toward the tech sector is tepid compared to efforts of names such as Lockheed Martin (LMT) -- at this point, investors shouldn’t be expecting too much from this business.
The company is currently looking like one of the bigger values in the defense industry right now. Not only does Raytheon sport a 4.2% dividend yield (one that’s fully supported by cash generation capabilities), but the firm’s P/E ratio of 7.6 means that its earnings are priced at half of the S&P 500’s historic average. Investors looking for a high-yield name at a discount should give this stock a second look.
Raytheon is one of the highest-yielding aerospace and defense stocks.
Home improvement giant Home Depot (HD) is another Rocket Stock that’s on the wrong side of investor sentiment right now. The company’s significant exposure to the housing market has helped to flush out weak handed buyers from shares, but it hasn’t slowed sales, which are slowly making their way back up to pre-recession levels.
Home Depot got knocked hard, starting in 2007, when an overly aggressive store expansion plan led to a hefty geographic footprint of unprofitable locations and an equally hefty debt load. To combat the position it put itself in, the company has been undergoing a restructuring of its operations to help improve efficiency and profitability. Margin expansion has been palpable as a result.
One of the biggest boons to Home Depot’s performance has been the fact that consumers are actually continuing to spend money on home improvements -- sales are on an upswing industry wide. Even if Wall Street has been cautious to recognize the increased strength in Home Depot, analysts are starting to come around. We’re betting on rising analyst expectations in Home Depot this week.
Home Depot is one of the highest-yielding retail stocks.
To see this week’s sentiment plays 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.