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5 Rocket Stocks to Buy This Week - views
BALTIMORE (Stockpickr) -- While U.S. markets were quiet yesterday for the MLK holiday, markets overseas were anything but. All major worldwide stock indices rallied yesterday, providing some signal that investors aren’t too concerned by Friday’s nine eurozone downgrades – France and Italy among them.
It seems that one of Wall Street’s 2012 resolutions was to take news of Europe’s debt crisis in stride.
Meanwhile earnings season is in full swing this week with a slew of firms announcing their numbers to cap off the final quarter of 2011. That earnings data could be the most important catalyst for stocks this month, as investors weigh whether their outlooks for stocks are on the money. With a lot of eyes on the market this week, we’re turning to a new set of Rocket Stocks to find gains.
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.
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In the last 136 weeks, our weekly list of five plays has outperformed the S&P 500 by 83.5%. With that, here’s a look at this week’s Rocket Stocks.
Philip Morris International
The last 12 months have been strong for shares of Philip Morris International (PM): This “sin stock” has seen its shares rally more than 36% in the trailing year as emerging markets exposure and a hefty dividend payout attracted investors to the world’s second-largest tobacco name. In the cigarette business, brand is everything -- customers are stickier than they are in most other industries, and popular names like Marlboro, L&M, and Parliament mean that the firm has a huge recurring revenue stream.
Of course, PM’s geographic base is a big part of its success. The firm is the international portion of Altria’s (MO) tobacco business, a unit that got spun off from its parent in early 2008. While the U.S. tobacco business is lucrative, hefty saturation and regulation make it less desirable than the international business. With exposure to some of the most attractive growth markets for tobacco right now, PM stands to be one of the biggest beneficiaries of middle class consumers trading up their brands abroad.
While earning cash in foreign currencies, then converting to dollars does pose some risks to PM’s earnings, the upside offsets the currency translation concerns that some may have. Because of that, Philip Morris International should be able to keep churning out a nearly 4% dividend yield for the foreseeable future.
It’s been a good quarter for the oil business, and $80 billion oil and gas operator Occidental Petroleum (OXY) hasn’t been left out. Shares of the company have climbed more than 14% in the past three months as oil prices remain near their highs. Those prices are critical to Occidental’s ability to continue churning out deep double-digit margins -- while much of the firm’s production is relatively low cost, investors should be aware that diminishing crude prices would eat away at the firm’s profitability quickly.
Occidental’s global reach has been a big part of its success story to date. The firm buys up proven reserves and uses its expertise to get them out of the ground cheaply -- while that requires more wherewithal from the company’s balance sheet, it also dramatically reduces the exploration risks to shareholders. The firm has been taking a more speculative bent in recent years, growing its shale assets dramatically as prices slowly crept up. That leaves the company in a solid position to start reaping returns on those fields -- especially as extraction technology lowers to cost of turning shale into cash.
Even though Occidental’s scale falls well short of the better-known oil supermajors, the firm has the size and strength to continue to perform at a high level in this costly-crude environment. With analyst sentiment on the upswing, we’re betting on shares of OXY.
Boeing (BA) is one of the world’s largest manufacturers of commercial and military aircraft, with more than $64 billion in sales for the firm’s latest fiscal year. Despite the firm’s huge installed base worldwide and a massive backlog in place, Boeing operates in a highly competitive industry with little in the way of an economic moat. From both the defensive and commercial aircraft front, Boeing faces competitors that are largely capable of offering comparable platforms -- that’s something that the firm will need to innovate its way around if it wants to remain relevant.
Defense, in particular, is a concern for investors. As Uncle Sam looks for costs to cut, the defense budget is likely to get spending slashed -- and Boeing’s programs could be among those to get chopped. That said, more exciting things are happening in the commercial aviation space. After many delays, Boeing delivered its first 787 Dreamliner into service on October 26 of this past year, a major milestone as the firm tries to grab airline dollars with its new high-efficiency offering.
That comes at the same time that some structural concerns arise over the high-profile Airbus A380, and Airbus announces that sales may drop by 50% this year. In the mean time, new efficiency improvements in its popular 737 line should keep revenues high without putting airline customers off of an entire platform that they’ve sunk considerable assets into. Investors should keep an eye out for Boeing’s January 25 fourth-quarter earnings call.
Purse maker Coach (COH) remains the best way to play the strength of the luxury apparel market right now. Even though consumer spending has been anything but elastic in the last year, luxury spending has actually stayed strong. That’s been particularly true for Coach -- the 71-year-old leather goods company posted revenue growth every year through the recession, coming in at more than $4 billion in sales for the year ended in July.
That growth isn’t showing many signs of abating right now. Management has been pushing hard into emerging markets like China, where burgeoning middle class consumers are clamoring to spend cash on aspirational Western brands like Coach. Deep margins should help to fuel significant profitability as the company grows its business in Asia.
One of the biggest catalysts for Coach’s success came at the height of the recession -- when other luxury brands were anxious about potentially diluting their brands by lowering prices, Coach reduced its prices and saw sales volumes ratchet higher as a result. Management’s strong stewardship of their brand shouldn’t be ignored as consumers start to feel less protective over their purse strings.
Archer Daniels Midland
Archer Daniels Midland (ADM) is one of the world’s biggest agricultural commodity processors, taking raw soft commodities as inputs and manufacturing everything from vegetable oil to flour on the other side. While that gives the firm exposure to one of the most exciting asset classes out there right now, investors need to be aware of what they’re getting.
For starters, ADM’s scale gives it significant advantages over smaller firms. On the financial side, that means that ADM is able to take advantage of global arbitrage opportunities that smaller companies can’t -- on the operational side, it means that actual products boast better margins thanks to a highly efficient transportation and production network. That’s not to say that ADM is without risks, however.
The company is exposed to commodity prices on both sides of its business. That means that the recent trend of rallying soft commodities could erode profitability if ADM can’t quickly pass its costs onto its customers. To date, the firm has been adept at hedging and trading its way away from those risks -- a fairly cheap valuation doesn’t reflect that right now. Earnings on Jan. 31 could be a big catalyst for shares to make a move.
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.
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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.