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5 Rocket Stocks That Could Rally - views
BALTIMORE (Stockpickr) -- Stocks are launching the New Year right, rallying 1.6% in the first four trading days of 2012. Now, with the second trading week of January under way, investors are going to be looking for a repeat performance.
With earnings season officially kicking off today at Alcoa’s (AA) after-the-bell earnings call, that’s a distinct possibility. Earnings season is the block of time each quarter when the majority of publicly traded companies announce their numbers to Wall Street. It’s an important catalyst for share prices -- after all, an unexpected improvement in earnings can dramatically change analysts’ valuation models for shares.
Of course, as well as the broad market did last week, our list of Rocket Stock names did one better. So far, our Rocket Stocks are up an average of 2.79% on the year. This week, we’ll ride the earnings season trend to find five more stocks that could rally.
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 135 weeks, our weekly list of five plays has outperformed the S&P 500 by 83.8%. With that, here’s a look at this week’s Rocket Stocks.
It may seem surprising, but big bank JPMorgan Chase (JPM) actually made this week’s list. While banking stocks got shellacked in 2011, JPMorgan got hit less hard than most of its too-big-to-fail peers thanks to double-digit net margins and a relatively low-risk profile. Shares have already climbed more than 6.35% this year -- and earnings on Friday could propel this banking giant higher still.
Risk has been a four-letter word for banks in the last year. More to the point, the problem has been that most big banks don’t have an adequate handle on just how much risk they hold on their balance sheets. And the labyrinthine web of assets and liabilities isn’t going to be sorted out conclusively for some time.
Of the big names, however, JPMorgan is arguably one of the better options; the firm’s capital base is huge, its mortgage arm didn’t overleverage itself during the financial crisis, and the company generates a substantial amount of fee-based revenues from a diversified group of businesses.
Investors should like the fact that JP Morgan bought back its own shares in 2011 and plowed cash into a 2.83% dividend yield. Both of those actions add value for shareholders -- and there’s reason to believe that will remain a priority in 2012.
With analyst sentiment on the upswing for this stock, we’re betting on shares this week.
Online auction giant eBay (EBAY) is the go-to marketplace for consumers who want to buy or sell everything from cars and computers to art and power tools. The firm’s massive user base is to thank for its scale -- more than $62 billion in merchandise traded hands on eBay’s platform in 2010, with the firm taking a cut of every transaction that it facilitated.
Next week’s earnings call could be a big catalyst for added upside in this stock.
In the last decade, eBay has made the transition from being purely an online auction site to handling more parts of customers’ transactions. eBay’s PayPal arm acts as a sort of online bank and payment network, and carried more than $92 billion worth of volume in 2010. While PayPal’s scale is an important part of eBay’s business, economic moats are shallow in that business -- particularly if high rates and PayPal’s relatively opaque customer service continues to alienate customers.
eBay’s unique auction infrastructure and the sunk cost of creating an account with positive peer reviews means that customers of the firm’s core site tend to be sticky, a factor that helps to reinforce the popularity of the network. The firm stands to benefit from increasing consumer spending in the new year.
Big bets on eBay in the most recently reported quarter come from John Griffin's Blue Ridge Capital -- the stock comprises 3% of the total portfolio -- and Daniel Loeb's Third Point, at 1.7% of the portfolio.
Simon Property Group
At $37 billion in market value, Simon Property Group (SPG) is the country’s largest real estate investment trust, or REIT. The firm owns 250 million square feet of malls, outlet centers, and other retail locations spread worldwide. That positioning was a major black cloud over SPG’s head during the height of the financial crisis; the combination of real estate and consumer spending exposure threatened to unseat SPG’s financial stability.
But while peers succumbed to the economic environment, SPG has been comparatively strong. A big part of that success has come from the fact that the firm enacted an aggressive debt restructuring plan, taking advantage of historically low rates and a balance sheet that was teetering on the brink of overleveraged. Today, the firm has ample liquidity to fund growth -- and plenty of dry powder if waters turn rough again.
Because REITs are legally required to pay out the vast majority of their profits to shareholders, they’re one of the best instrument out there for income investors. And for a number of structural reasons, exposure to the commercial real estate market is minimal. Investors shouldn’t sweat this firm’s positioning.
Visa (V) is the world’s largest payment network, its logo on more than 60% of the world’s outstanding credit and debit cards. That absolutely massive share of the market is a bit of a self-fulfilling prophecy for Visa; consumers want to carry Visa cards in their wallets because they’re accepted everywhere, and merchants want to accept Visa because everyone carries them.
That network effect shouldn’t be ignored in the case of this firm. With No. 1 status by a wide margin, the firm’s economic moat is equally expansive.
During the financial crisis, one of Visa’s most notable attributes was the fact that it didn’t carry any credit risk. While Visa’s network processes consumers’ payments (and collects a fee on each transaction), it was banks and other financial institutions that were actually issuing the cards. That agnosticism over debt issuance is part of the reason why Visa has been so successful at cornering the debit card market, a payment option that gained preference after Americans started shredding their credit cards.
Even though spending levels have been muted for the last couple of years, Visa stands to benefit from the transition from cash and checks to cards. Even if spending were to stay stagnant for the next few years, eschewing cash in favor of Visa would mean increased revenues for the firm.
2011 was a strong year for shares of Alexion Pharmaceuticals (ALXN), one of TheStreet Ratings' top-rated biotechnology stocks; the $13.8 billion biopharma stock has climbed more than 80% in the last 12 months alone. While the firm’s sole product, Soliris, is a therapy for a very rare blood disease, that limited marketability is actually a good thing for shareholders of the firm.
As a so-called orphan drug, Soliris is able to sport a sky-high price tag for insurance companies with literally no competition. That’s the exact same strategy that Alexion is pursuing with its other pipeline therapies. By focusing on diseases with limited scope and potential high treatment costs, the firm is able to capture higher per-patient revenues than most other pharmaceutical firms, and it’s able to generate net margins well above 30%.
While Alexion carries more risks than an establish large pharmaceutical, a rock-solid balance sheet should help to smooth any rough roads for shareholders.
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.