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5 Rocket Stocks to Buy This Week - views
BALTIMORE (Stockpickr) -- Monday’s early trading is kicking off a quiet start to the week -- just what investors need to keep this “shadow rally” going. Since the market made a near-term bottom back on June 4, this rally has accounted for nearly 90% of the gains that the S&P 500 has turned out in all of 2012. But investors are still anxious about investing in stocks.
That lack of participation in the rally is bound to have some interesting effects on investors’ behavior as we approach Fall 2012. As investors go “risk on” to catch up to the climb that equities have made this year, they’re going to help to propel stock prices even further -- especially when the toxic effects of treasuries start taking their toll.
It’s one thing to sacrifice a negative real yield when stocks are super volatile; but big treasury exposure becomes a whole lot harder to justify when equities enjoy a 20% bull rally. And as I write, a 20% year is almost exactly where stocks’ current trajectory has us pointed.
That’s why we’re turning to a new set of Rocket Stocks 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 164 weeks, our weekly list of five plays has outperformed the S&P 500 by 76.63%.
With that, here’s a look at this week’s Rocket Stocks.
Kraft Foods (KFT) proves that bigger is often better in the consumer staples sector. Kraft, the biggest packaged food firm in North America, owns an attractive portfolio of brands ranging from Nabisco and Maxwell House to Oscar Mayer and Kool-Aid. That diverse portfolio of brand name foods has helped to insulate the firm from rivals -- consumers tend to be stickier about food brands than they are about products such as cleaning supplies.
The jewel in Kraft’s crown is a global distribution network that enables the firm to move its products worldwide cheaply. Because the firm’s different brands can share distribution efforts, moving products is cheaper, and Kraft is able to combat some of the higher input costs that have been pressuring margins of late. A bigger focus on cost bodes well for the firm -- as Kraft finds more places to trim expenses, expect a bigger number to show up on the bottom line.
Of course, Kraft is in line for some big changes. The firm is planning to split its business into two separate food companies: a snack business and a grocery business. The spinoff is expected to be completed on Oct. 1, in a move that should help break off the lower-margin grocery businesses from Kraft’s income statement. Investors who get in now get a piece of both firms.
2012 has been a good year for Danaher Corporation (DHR): So far this year, shares of the $37 billion company have rallied more than 14%, besting the already impressive gains that the rest of the S&P 500 has turned out over that same time.
Danaher is a diversified manufacturer that holds dozens of brands and businesses under its corporate umbrella. The firm makes everything from power tools to medical devices.
The firm is a standout in a highly cyclical industry. It has been able to keep up its strong sales momentum since the recession, turning out breakneck top-line growth while keeping net margins in the double-digits. A big part of that success has come from Danaher’s niche exposure: because the firm sells nuanced medical devices and testing instruments, it’s less susceptible to the ebb and flow of consumer sales than many other manufacturers are.
Growth by acquisition has been Danaher’s modus operandi for the past several years, giving the firm to immediately step into a new business as long as it can buy it at a good price. Much of that acquisition strategy has been fueled internally by cash, resulting in a very manageable debt load for investors.
Investors looking for attractive exposure to the manufacturing business can look no further than DHR.
Time Warner (TWX) is enjoying some strong stock performance in 2012 too. The firm has seen its shares rally almost 18% this year, buoyed by the premium placed on its valuable content. With television networks such as HBO, CNN and TNT under its belt -- as well as the largest film studio in the world between Warner Bros. and New Line Cinema -- TWX has plenty of intellectual property to leverage on its balance sheet.
The decision to split off its cable utility business and its internet arm in 2009 was a good one. It broke apart three disparate businesses that had little in common below the surface. Today, cable networks generate the lion’s share of TWX’s cash, and also hold the keys to the castle going forward. As new technologies like streaming video gain popularity, they could represent increasingly important revenue streams for content owners like TWX. And splitting off the cable business, for instance, removes one big potential conflict of interest.
Time Warner’s film studios and publishing units together make up a material chunk of TWX’s revenues, and offer some semblance of a moat simply because their scale is tough to replicate. The film studio is massive, and magazine titles such as People and Time offer investors exposure to the last bastions of profitable print publishing.
Especially with its attractive 2.44% dividend yield, Time Warner looks attractive right now.
Time Warner shows up on a recent list of 8 Undervalued Stocks Getting Help From the U.S..
Investment management is another business where bigger is better. And it doesn’t get any bigger than BlackRock (BLK).
At last count, the firm has more than $3.5 trillion in assets under management, making it the biggest investment manager in the world. BlackRock has undergone some big changes since the acquisition of Barclays Global Investors that turned BLK into the biggest asset manager out there. The biggest is increased exposure to equities, which now make up more than 45% of assets. That equity exposure may be heftier than the firm is used to, but it also comes with bigger management fees.
Since acquiring BGI, BlackRock has focused on becoming a one-stop shop for investors, regardless of what they’re looking for in an investment. That means that BlackRock’s investment menu has expanded to include all sorts of alternative investments and ETFs, products that perhaps make BLK’s grasp on AUM a bit more tenuous (low-risk strategies tend to have stickier assets) but are necessary for the firm’s strategy.
Despite ramping up the number of retail investors it serves, BlackRock still gets two-thirds of its assets from fellow institutional investors, a group that tends to be less fickle and more willing to stay in a fund than nonprofessionals. If BLK is willing to court more retail investors, though, it’ll have a big growth avenue ahead of it in the next few years.
Retailer Macy’s (M) has seen its share of ups and downs in 2012, but with more ups than downs right now, investors should be giving this mall anchor a second look.
Macy’s operates more than 850 Macy’s and Bloomingdale’s department stores spread throughout the country, selling a mix of apparel, home furnishings, and other consumer-driven categories. While that was a black eye during the recession, it’s becoming a less scary thing for investors now.
Macy’s has made significant strides toward improving its internal efficiency, strengthening localized merchandising efforts and working on driving more traffic into its stores. A major restructuring dramatically reduced the firm’s headcount and contributed to a return to profitability in recent years. More recently, the payoff has been incremental increases in same-store sales and net margins, two critical areas that retail investors focus on.
With rising analyst sentiment in shares this week, we’re betting on upside in Macy’s.
Macy's is one of George Soros' holdings.
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.