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BALTIMORE (Stockpickr) -- It’s make-or-break time once again for Mr. Market.
Stocks shoved their way to just shy of 1225 resistance in the S&P 500 by Friday’s close. The fact that the broad market is sitting just below a previously significant pocket of supply for S&P 500 stocks is telling -- it suggests that stocks still need some sort of a fundamental catalyst to break higher than that price level.
As auspicious as a test of 1225 may be, it’s worth noting that the last two times the S&P attempted to move above this level, stocks sold off en masse. The added impact of earnings does add some potential force behind this attempt, but from a technical perspective, this rally remains less than certain. That’s what makes today’s trading session so significant.
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With uncertainty ratcheted higher to kick off this week, we’re turning to a new set of Rocket Stocks to squeeze profits out of this market.
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 125 weeks, our weekly list of five plays has outperformed the S&P 500 by 82.2%. 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.
Investors are looking for a rebound in gold right now – one of the best ways to play that trend is through Barrick Gold (ABX). Barrick is one of the world’s biggest metal miners, with 7.9 million ounces of gold production and 368 million pounds of copper production last year. The firm isn’t just attractive from an analyst expectation perspective -- this Rocket Stock is also among the gold miners that are trading at a discount to gold spot.
Barrick’s exposure to gold prices is driven by the fact that the firm doesn’t hedge against the price of gold. That means that this firm’s fortunes are tied to the value of the metal that it pulls out of the ground. That wasn’t always the case, but disastrous hedging losses on rallying gold prices in 2009 prompted the firm to dramatically limit its hedging positions.
Compared with its competition, Barrick isn’t the cheapest gold producer out there. But its scale -- and visibility -- makes up for that. It’s worth noting that the swift ascent of gold prices means that even higher-cost gold producers are sitting on massive margins right now.
We’ll see just how well that plays out when the firm releases its third-quarter earnings on Oct. 27. We’re betting on shares this week ahead of the announcement.
Also betting big on Barrick is Daniel Loeb's Third Point, which initiated a 1.9 million-share position in the stock in the most recently reported quarter.
It’s been a surprisingly good year for shareholder of Dell (DELL), one of TheStreet Ratings' top-rated computer hardware stocks. Shares of the $30 billion computer firm have rallied more than 22% year-to-date, spurred on by solid earnings early on in 2011. Like many computer companies, Dell is in the process of transforming its business, shifting attention from the commoditized PC business to more service-oriented and economic moat oriented IT offerings like servers and networking solutions.
Because the PC business lacks any sort of advantage for any single manufacturer (barring Apple (AAPL), of course), margins have been shrinking as consumers discount brand names and focus instead on system specifications when making computer purchases. Dell’s enterprise offerings do boast higher profitability, but the business is fraught with stiff competition and a demanding customer base.
To be clear, Dell does have the financial wherewithal to compete (either through more acquisitions or by funding its own internal teams), but the firm will need to be more aggressive in stepping its focus away from its consumer business.
The shift to selling its computers through third-party sales channels should take some of the effort out of the PC business. Dell has already built a recognizable name that should help it attract consumers as long as pricing remains competitive -- without the need to spend as much on driving consumers to its own sales sites, money will be better spent on new enterprise initiatives. This firm’s third-quarter earnings get released on Nov. 17.
Another tech name on this week’s Rocket Stocks list is video game maker Activision Blizzard (ATVI), also in Whitney Tilson's portfolio as of the most recently reported period. This nearly $15 billion developer is one of the biggest names in the industry, laying claim to kingmaker franchises such as World of Warcraft, Guitar Hero and Call of Duty.
The firm’s ability to easily expand its game portfolio under those titles should continue to pay dividends for the foreseeable future -- and help to finance Activision’s actual dividend payouts to shareholders.
The subscription model of World of Warcraft is a game changer for Activision Blizzard. The model enables the company to sell its games piecemeal, and then generate massive recurring cash flows through subscription fees (currently around 12 million players subscribe to WoW). The sheer popularity of the title ensures that barriers to entry remain high for potential competitors. While console giants such as Guitar Hero and Call of Duty don’t have the same revenue generation capabilities (online console play is typically controlled by the console maker), they do provide ample opportunities for ATVI to release new titles on a regular basis.
Video game makers are fairly susceptible to economic headwinds, but Activision’s balance sheet gives it a bit more leeway than most; the firm’s coffers are stuffed with $3 billion in cash with no debt. With analyst sentiment on the rise, we’re betting on shares this week.
With a tenuous grip on retail sales still plaguing most mall anchors, Macy’s (M) has been performing surprisingly well in 2011. The firm, which operates more than 850 Macy’s and Bloomingdale’s stores spread throughout the country, has actually seen its share price rally more than 15% year-to-date -- outpacing the rest of the retail industry by almost 20% over that same period.
Macy’s has made significant strides toward improving its internal efficiency, improving its 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 margin improvements that have put the firm’s financials a cut above lately.
Competition still remains fierce among department store retailers. The main advantage at Macy’s has been the fact that most peers have failed to embrace new initiatives as well as it has. Analysts are expecting an earnings release on Nov. 9.
Under Armour (UA) is a mid-cap sports apparel firm that’s made some massive strides toward competing with the industry’s standard bearers in recent years. While Nike (NKE) remains the big name to beat in the industry, Under Armour has been using its technology-driven approach to attract customers looking for performance apparel that has features that peers haven’t had until recently. That’s resulted in the creation of a powerful brand in Under Armour -- one that can now command premium pricing from consumers.
The firm took a similar approach to endorsement deals, opting to look for emerging stars rather than signing players who are already big names. Because Under Armour’s small scale has given the firm the ability to find growth in the already-saturated U.S. sports apparel market, UA hasn’t paid a whole lot of attention abroad. In total, overseas sales only make up around 10% of the firm’s total revenues; that lack of international exposure provides ample growth opportunities once UA starts to exhaust its top-line expansion stateside.
There’s little question that Under Armour is a growth name rather than a value stock. This Rocket Stock currently trades for a very high multiple. As a result, this name makes most sense as a momentum investment. We’re betting on shares as analyst sentiment continues to ratchet higher.
Under Armour shows up on a recent list of 8 Footwear Stocks With Upside.
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.