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5 Rocket Stocks to Buy This Week - 15616 views
BALTIMORE (Stockpickr) -- Risk was “on” last week, as investors bucked Monday’s significant selloff to push the S&P 500 2.12% higher on the week by Friday’s close. It wasn’t just the weekly gain in the S&P that demonstrated investors’ risk appetites last week; it was also the kinds of stocks that were catching bids. Consumer-driven names contributed the brunt of last week’s gains, while more defensive names sat idle.
The mini-rally that we’re seeing right now is pretty tentative. Economic factors are still a drag on the broad market, particularly in Europe, where the drama continues to unfold. Even so, the kickoff of earnings season this week could provide investors with a much-needed positive shift in sentiment.
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With uncertainty still playing a major role for Mr. Market, it makes sense to look for pockets of strength right now. That’s why we’re turning to Rocket Stocks.
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 124 weeks, our weekly list of five plays has outperformed the S&P 500 by 83.3%. This week, we’ll aim to continue beating the market with another set of names.
With that, here’s a look at this week’s Rocket Stocks.
Diversified technology and manufacturing firm Honeywell (HON) has its hand in everything from aerospace systems to home thermostats. While 2011 has been anything but a banner year for shareholders (the stock has slid 14% year-to-date), it’s important to remember that there’s still a major disconnect between many firms’ fundamental health and their share prices. Fundamentally, Honeywell has been enjoying some significant improvements in its business.
On a trailing 12-months basis, Honeywell’s revenue is a hair’s breadth away from its pre-recession highs, and profitability is higher than ever. While many of Honeywell’s key, capital-intense businesses were hard hit during the recession, they’re springing back with force now that capital is flowing cheaply once again. Aviation sales are on the upswing, as are the fortunes of many of the industrial clients that Honeywell outfits with automation and process control solutions.
Honeywell opted to pay down debt and shore up its financial strength following 2008; the result is a firm that’s now much better suited to handle another economic rough patch. It also means that the firm’s nearly 3% dividend yield is far more secure than it was just a few years ago. While meaningful growth -- through jet sales and industrial production -- will be predicated on health in the broad economy, Honeywell is looking strong right now.
Honeywell is one of the top-yielding aerospace and defense stocks.
Simon Property Group
$32 billion retail real estate investment trust Simon Property Group (SPG) is another name that’s seen pressure from its positioning. With exposure to the troubled commercial real estate market, it’s no surprise that investors have been wary of SPG’s wherewithal -- especially as outwardly similar peers dealt with bankruptcies. But this REIT’s risks have been overplayed.
Like most REITs, Simon Property Group is more of an income generation vehicle than a way to gain exposure to commercial real estate. The firm signs on tenants with long-term triple-net leases that essentially insulate SPG from most of the risks that come from the ebb and flow of the real estate market. As a result, the only real economic stressors on the firm come in the event of a tenant going out of business. Given that most tenants are large retail chains, that’s a rarely rare event even in the height of a recession.
Right now, Simon is in solid financial shape. The firm has a liquid balance sheet with more than $2 billion in cash and investments. Investors who held SPG through the recession took valuation hits as the firm wrote down its real estate assets. While that book value can’t go back up, the result is a balance sheet that grossly understates SPG’s real assets. Investors should welcome that conservatism.
They should also like the income generation; SPG currently pays out a 2.9% dividend yield. Built-in inflation adjustments in the firm’s leases should keep this stock a step ahead of the diminishing buying power of the dollar.
Dollar Tree (DLTR) is one stock that’s having a good year in 2011. Actually, the firm is having a great year -- shares have rallied more than 38% since January.
As the largest deep discount retailer in the country, Dollar Tree has been one of the biggest beneficiaries of a rough economy. As consumers traded down to less expensive shopping options, Dollar Tree attracted a whole new demographic of shoppers to its more than 4,000 locations. Because the firm’s draw is “everything for $1,” supply chain management is crucial; the company is already expert at keeping costs down from the time it purchases inventory to the time it hits store shelves. As a result, net margins have consistently rung in above 6% -- hefty profitability for any retail name.
There’s been some concern that dollar store concepts will become less relevant as consumer spending ticks higher. While that’s a serious concern, Dollar Tree’s introduction of its higher-priced Deal$ concept should help to bridge that gap and keep shoppers spending cash at the firm’s stores. With increasing analyst sentiment this week, we’re betting on shares.
Dollar Tree, one of TheStreet Ratings' top-rated multiline retail stocks, shows up in various professional portfolios on Stockpickr, including Blue Ridge Capital's and Lone Pine Capital's as of the most recently reported period.
Industrial maintenance and repair supplier W.W. Grainger (GWW) is one of the stocks to watch out for this earnings season. The firm announces its third-quarter earnings on October 18.
Grainger’s products range from toilet paper rolls to ladders and safety equipment -- and everything in between. That’s a recession-resistant business that’s capable of generating impressive returns regardless of what’s going on in the broad economy. After all, companies need to maintain their facilities even if sales are slowing.
For that reason, competition is the biggest problem that Grainger faces right now. Switching costs are low in Grainger’s business, and the firm’s offerings can easily be found elsewhere -- two factors that take pricing power away from this firm.
Still, the international one-stop-shop nature of Grainger’s inventory means that customers are likely to turn to this firm if only for convenience. As long as Grainger can keep its costs as low or lower than its competition, the firm should have a palpable advantage. Expanding its offerings to each client should help Grainger to increase customer stickiness as well top-line sales.
With almost 4,700 retail stores in the U.S. and Mexico, AutoZone (AZO) weighs in as the world’s largest aftermarket car parts seller. The firm is another major beneficiary of consumers’ trading down -- as credit markets seized and new car sales stagnated, AutoZone actually saw sales increase as consumers sought to keep older cars running. While that structural advantage has been mitigated by negative real interest rates, and aggressive incentives by car dealers, AutoZone is still generating strong sales numbers.
International expansion is one attractive growth avenue for AutoZone – and expansion to other markets seems like a logical progression for the firm. Another area of growth is the firm’s entrance into the commercial market, selling parts directly to garages and dealers. In the commercial market, AutoZone is a small fish in a big pond; it should be able to secure near-term growth merely by taking share from some of its competitors.
With analyst sentiment rising in shares of AutoZone, we’re betting on shares of this Rocket Stock this week.
AutoZone shows up on a recent list of 7 Low-PEG, High-Momentum 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.