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5 Rocket Stocks Fueling Up This Week - views
BALTIMORE (Stockpickr) -- Traders are trickling back in from the long weekend this morning, coming into the office and onto the trading floor just as the broad market is set to test a key level for stocks. As I write, the Dow sits just shy of 12,950 -- a mere 50 points away from the 13,000 level that’s been getting so much attention for the last few days.
While 13,000 is a technical (and psychologically) significant price level, I think that the corresponding 1365 level in the S&P 500 is a more meaningful price to watch out for; in general, the S&P is a much better proxy for the broad market than the more popular Dow is. But whichever index you’re watching, the potential for U.S. stocks to move back up to their pre-recession highs is a big deal.
That sort of a move could definitely extend investors’ early gains in 2012.
Just how the S&P reacts to that 1,365 resistance level is going to tell us a lot about the strength of the rally that’s shoved the same index up 8.24% on the year. A push through that level indicates that buyers are more willing to buy there than sellers are to take gains -- a very bullish signal for market participants. Ahead of the move, we’re looking at a handful of new Rocket Stock names that could benefit from the sentiment swing.
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 140 weeks, our weekly list of five plays has outperformed the S&P 500 by 83.66%.
With that, here’s a look at this week’s Rocket Stocks.
The past year has been an impressive one for Starbucks (SBUX) shareholders. In those 12 months, the firm has plowed into international growth and expanded its presence on grocery shelves -- and shares have rallied more than 42% as a result. In many ways, Starbucks is a stock that’s left investors asking whether there’s still room to find growth in a particularly saturated market. But time after time, the answer has been a resounding “yes.”
So can this stock answer “yes” again in 2012?
There’s no question that saturation is the big question for Starbucks. After all, the idea of a Starbucks location has become a running joke. But the firm has moved its focus onto international locations and retail grocery shelves as a way to sustain its historically impressive growth rates. Both of those areas benefit from dramatic room for growth over the long term.
Even though Starbucks has significant secular tailwinds in its chosen growth areas, the firm isn’t going to be able to rest on its laurels. With traditional fast food chains stepping into the premium coffee business, Starbucks needs to remain fiercely competitive if it wants to retain its impressive 4% share of the lucrative domestic coffee market.
With rising analyst sentiment in shares this week, we’re betting on Starbucks.
In the fourth quarter, Steven Cohen's SAC Capital added over 2 million shares of Starbucks to its portfolio, a 581% increase to its position. The stock was also featured recently in " 5 Stocks Insiders Are Loading Up On."
Diversified manufacturer Honeywell (HON) has finally shaken off the sales drag of the recession, meeting its pre-crash revenue highs and surpassing pre-crash profits during fiscal 2011. While the firm’s product mix is still somewhat susceptible to economic hiccups, Honeywell has done a good job of proving that it’s not quite as susceptible as investors feared.
In 2012, the firm’s more efficient operations should help give shareholders a standout year.
Honeywell manufactures everything from aircraft and industrial automation components to security systems and residential thermostats. Even though excessive exposure to the transportation sector made it painful to own HON in 2008, it’s making this stock a much more attractive offering in 2012; being at the front-end of the business cycle does have its advantages when the market turns higher. The industrial business should add some fuel to the mid-side of the business cycle for shareholders, especially given the strength that industrials have exhibited lately.
The firm’s growth-by-acquisition strategy has proven effective in the past, even if it’s historically come at a cost to short-term performance. That said, with true bargain opportunities drying up of late, acquisition restraint on the part of management would be commendable.
Instead, look for Honeywell to squeeze better returns out of its existing purchases.
Honeywell shows up on a list of 5 Picks for 2012 in Aerospace, Defense.
High-end handbag retailer Coach (COH) has been a standout in recent years by clinching double-digit growth in a luxury business at the same time that the economy was flailing. That performance has put this firm on track to do one better in 2012.
Coach took a calculated risk by dropping its price points as the recession took hold of consumer spending habits. Where other luxury manufacturers were scared of diluting their brands, Coach actually strengthened its image by selling the idea of attainable high-end to consumers in its 345 North American stores during the financial crisis. That success set the stage for a follow-up act abroad as the firm expanded its exposure to markets like Europe and China.
The emerging markets hold the most attractive prospects for Coach in 2012. While domestic consumer spending tailwinds are likely to be great for the firm, a burgeoning middle class in China is clamoring to buy Western brands as status symbols, and Coach is among the best positioned to take advantage of the trend. To be sure, this stock isn’t as cheap as it was back in 2009 -- everyone knows the Coach success story at this point.
That said, the growth potential in shares right now shouldn’t be ignored at this price,
CIT Group (CIT) has a slightly less attractive recession story. The $8.3 billion commercial lender got its hat handed to it during 2008 and 2009, culminating in a fire sale of the firm’s home lending arm and subsequently bankruptcy toward the end of 2009. While it didn’t take long for the firm to relist its new shares on the NYSE, it has taken a while for CIT to look attractive to retail investors again.
Today, like so many other bank holding companies, CIT has re-aligned its business focus back to its core competency: commercial lending. The firm’s bread and butter is lending capital to small and medium-sized businesses, a model that’s extremely lucrative during the best of times even if history shows it’s potentially devastating during the worst of them. Improved risk-management should mean that CIT is going to take a more measured approach to lending going forward. Increased focus on fee-based services for businesses should help take some of the top-line onus off of credit-risk.
While the risks to this stock are still fairly large, analyst sentiment is on the upswing for shares this week. For that reason, we’re betting on CIT in February.
CIT is one of the top holdings at Bruce Berkowitz's Fairholme Capital Management, comprising 10.6% of the total portfolio.
Amphenol (APH) is having a stellar year already in 2012, up more than 24% following positive earnings and guidance in mid-January. The $9.3 billion connector company generates more than 90% of its revenues from the sale of interconnect devices, components that are used to connect electronics in a bevy of different applications. That provides the firm with fairly dramatic revenue diversification that includes exposure to particularly attractive markets like mobile device business, where Amphenol’s products are found in around 50% of devices on the market today.
Because Amphenol’s components are typically bought by OEMs, they’re integral to device designs, and switching costs are exceptionally high. For that reason, the firm has extremely high customer stickiness (manufacturers are more likely to opt for a single connector supplier), and more pricing power than other firms in the electronics business. Also attractive is the fact that fixed costs are fairly low in the connector business; combined with Amphenol’s reasonably wide economic moat, the result is high margins and limited competition.
Going forward, it’s going to be crucial for Amphenol to continue to look attractive to a wide array of manufacturers. To do that, the firm will need to continue to put money into developing rugged, low profile connectors that can easily be adapted to different applications with minimal lead time.
An attractive balance sheet and ample cash flow generation should help to subsidize that cost this year.
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.