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5 Rocket Stocks Poised for Gains - views
BALTIMORE (Stockpickr) -- Europe is kicking its way to the front of investors’ minds this morning, as concerns of a new credit crunch across the pond weigh on U.S. stocks. The question now is whether that added anxiety will derail the market’s recent successes.
Last week, investors shrugged off eurozone drama, instead focusing on positive economic numbers here at home -- but with a record number of large speculators short the euro right now, recovery efforts are going to be that much harder to pull off. At the same time, the ECB worked out a deal with the Fed to increase dollar funding available to Europe’s banks. While it's positive that the ECB pulled it off, it’s a less positive development that it needed to pull it off in the first place.
Despite the threat of more European drama hitting the market this week, there are still buying opportunities in stocks this December. To find them, we’re turning to a new set of Rocket Stocks.
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 132 weeks, our weekly list of five plays has outperformed the S&P 500 by 80.67%. With that, here’s a look at this week’s Rocket Stocks.
Home improvement retailer Home Depot (HD) has been having a strong year in 2011; shares of the $62 billion firm have rallied nearly 15% since the start of January. As consumers continue to ramp up spending on home improvement, that trend should continue into 2012.
With 2,248 stores and nearly $68 billion in annual sales, Home Depot is the largest home improvement retailer in the world. In the years leading up to the financial crisis, that scale had been Home Depot’s biggest detractor. The firm levered up hard to build its footprint, and it was left with weak profitability and unprofitable locations as a result.
But thanks to a major restructuring initiative, that’s no longer the case. More recently, Home Depot has worked to improve its distribution network and merchandising capabilities, bringing its net margins in line with top rival Lowe’s (LOW) in the process.
Wall Street has consistently underestimated consumers’ willingness to spend money on home improvements in a subdued housing market. As spending continues to tick higher from HD’s fiscal 2010 revenue lows, shares should continue to move higher. We’re betting on this stock as analyst sentiment moves higher.
CVS Caremark (CVS) is one of the biggest names in retail pharmacies, filling more than 1 billion prescriptions each year. Unlike Home Depot, that size hasn’t been a problem for the firm -- revenue actually grew during the recession, only slowing slightly last year.
That’s thanks in large part to CVS’ outsized exposure to pharmacy benefit management through its 2007 Caremark acquisition; because the company isn’t as reliant as peers on selling discretionary products at its 7,000 retail locations, it has a stronger safety net.
One of the most attractive avenues for growth has been CVS’ MinuteClinic brand of health clinics located in 500 pharmacy locations. Health care costs in the U.S. are high, so consumers are likely to turn increasingly to options like in-store clinics for health screenings and minor medical treatment.
The addition of MinuteClinic to CVS’ stable of offerings is important for another reason -- it creates a complete vertical integration of healthcare provider, benefits management and retail pharmacy, a combination that should keep costs low and incentivize customers to use CVS each step of the way. By that same token, it should also keep rivals like Walgreens (WAG) and Rite Aid (RAD) playing catch-up in 2012.
CVS, one of Warren Buffett's favorite stocks -- his Berkshire Hathaway initiated a new 5.7 million-share position in the most recently reported quarter -- is also one of John Paulson's 10 Best New Investment Ideas.
Coffee giant Starbucks (SBUX) is another stock that’s had a blockbuster year in 2011. Shares of the firm have rallied more than 36% year-to-date, vs. a small loss in the S&P 500 over that same period. That growth has come almost exclusively from Starbucks’ ability to pull the trigger on new growth initiatives.
The long-running joke has been that there’s a Starbucks location on every corner in America. Less funny is the saturation that Starbucks stores have been facing in the last several years. To continue to deliver meaningful growth to investors, Starbucks needed to think differently about their business. And the firm has done just that.
Starbucks has found success on grocery shelves, marketing its own line of everything from ground coffee to flavored ice cream and individual serving pods for the popular Keurig line of coffee makers (a business projected to become a $1 billion contribution to the firm’s top-line as it matures). A combination of international expansion and new grocery initiatives should keep growth flowing to investors in 2012.
BlackRock (BLK) weighs in as the world’s largest asset manager thanks to more than $3.3 trillion in client assets under management. The vast majority of that asset base is made up of equity and fixed-income holdings respectively, an asset mix that generates higher fees than managers whose mix is weighted more heavily toward lower-risk alternatives.
That hasn’t always been the case. Before the financial crisis, BlackRock’s focus was institutional fixed-income, a sticky business that generated comparatively less fee revenue than the equity business. But the company has completely shifted its focus through the acquisition of Merrill Lynch Investment Managers back in 2006 and then Barclays Global Investors in 2009. The two acquisitions ballooned BlackRock’s AUM and gave the firm additional exposure to retail investors.
While BlackRock’s scale is immense, there’s still room for growth for this firm. While company shakeups increased exposure to retail investors, they still make up less than a quarter of BLK’s assets. That could increase in the next few years, particularly as high market volatility sends investors looking for money managers with scale and expertise in fixed-income.
BlackRock, which comprises 1.7% of Blue Ridge Capital's portfolio, shows up on a list of 15 Cheap High-Dividend Stocks for Defensive Investors.
As one of the largest regional banking stocks, BB&T Corporation (BBT) has stood out as a perennial performer throughout the financial crisis. The firm was one of the few banks to remain consistently profitable during the financial crisis, and it remains exceptionally profitable today as a result of stricter underwriting standards and a focus on retail and commercial banking.
Even though hefty exposure to lending in Florida (where housing was among the hardest-hit) remains a black eye for BB&T, it’s been more than offset by the dirt-cheap acquisition of Colonial Bankgroup’s $22 billion in assets from the FDIC back in 2009. Increased fee-based revenue would be a good focus for the bank to pursue going forward.
We’re betting on shares this week as analyst sentiment ticks higher.
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.