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BALTIMORE (Stockpickr) -- And just like that, investors like stocks again.
>>5 Stocks Poised for Breakouts
This new wave of equity optimism is setting the stage for even higher price levels by the end of September. 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.
>>5 Stocks Under $10 Set to Soar
In the last 168 weeks, our weekly list of five plays has outperformed the S&P 500 by 78.58%.
Without further ado, here’s a look at this week’s Rocket Stocks.
First up is chipmaker Broadcom (BRCM). The $20 billion firm is a major supplier for communications applications -- and it’s speculated to be a major contributor to the iPhone 5’s internals. That positioning puts Broadcom in solid positioning to capture growth in the mobile phone market, one of the fastest-growing consumer electronics segments out there right now. >>4 Chip Stocks Apple Fans Should Love One of the most attractive (and unique) attributes about Broadcom’s model is the fact that the company doesn’t own its own production facilities. Instead, it outsources those tasks to third parties. While that means that BRCM cedes some profitability to its manufacturing contractors, the fact that BRCM doesn’t carry chip factories on its balance sheet (and their associated overhead on its income statement) means that the firm cuts a leaner profile and didn’t get hit as hard by the recent pullback in the semiconductor industry.
Because Broadcom’s chipsets span a range of communications standards -- including GPS, Bluetooth and Wi-Fi -- the firm was one of the first to perfect combining hardware for different technologies on a single chip. That’s driven sales to space-focused firms like Apple (AAPL) who are trying to jam more and more into each device they make.
With the acquisition of a 4G wireless platform developer in 2010, the firm is plugging a big hole in its product lineup and offering a more holistic solution for handset makers. That could be a big boost for investors in 2012.
$16 billion regional bank SunTrust Banks (STI) is a big name from the Southeast to the Mid-Atlantic, with more than 1,650 branches spread throughout its geographic footprint. The Atlanta-based banking firm is in growth mode right now, after investors got hammered by losses and equity dilution in order to shove toxic debt off of the bank’s balance sheet and repay TARP. Now that the pain is over, investors should be looking to gain in the latter part of 2012. >>4 Big Bank Plays From JPMorgan After all, shares are already up more than 68% in so far this year. From a relative strength standpoint alone, this stock is already in prime position to push higher. Fundamentally, though, things look even better.
While SunTrust’s exposure to markets like Florida, where housing is still struggling, was a big black mark on shares, the firm has benefitted more recently from an economic rebound in the region. The ability to grow its loan book at “new normal” values for its collateral should provide a nice backstop for STI’s balance sheet going forward, and a more cost-conscious approach to banking is already showing up in the firm’s widening net profit margins.
With analyst sentiment pushing higher this week, we’re betting on shares.
It’s been a solid year for shareholders of Ametek (AME). The $9 billion electronic instruments company has rallied more than 28% since the first trading session in 2012.
Ametek builds electronic components that range from temperature sensors to specialty motors used by original equipment manufacturers. That niche business affords AME a sticky customer base with a high switching cost, two critical factors for success in the manufacturing sector.
Like other diversified industrial firms, Ametek saw significant pressure when the recession hit and factory outputs tapered off. But the firm is more than making up for it now, with revenues far surpassing pre-recession highs last year. And all the while, the firm remained handily profitable, with net margins now weighing in at more than 13.5%. Management has done an impressive job of keeping Ametek’s head well above water during the roughest economic seas.
While a growth-by-acquisition approach to business has been pricey for Ametek, the firm’s balance sheet is strong, with over $300 million in cash and investments offsetting some of the company’s $1.5 billion debt load. With AME’s profitability giving the firm plenty of cash to throw at its debt, the firm is in solid shape to keep performing at a high level right now.
Stericycle (SRCL) is the biggest medical waste management firm in the country, providing hospitals, medical offices, and pharmaceutical firms with a way to dispose of highly regulated biologically hazardous waste. Not surprisingly, dealing with the consumables no one else wants to touch is a lucrative business, with deep profit margins and a sticky customer base.
Regulation built Stericycle’s niche. Because healthcare facilities can’t simply toss spent needles and bloody gauze in the trash, Stericycle was able to step in and provide a simplified way of disposing of that type of high-risk waste. With health care reform passed, Stericycle should see some attractive tailwinds at its back -- namely the transition that more patients make from hospitals to medical offices for treatment. Because medical offices are lower-volume waste producers, Stericycle can collect deeper margins for their trouble.
Stericycle enjoyed stair-step growth during the recession, posting new sales and profit highs each year despite an economic meltdown that was threatening less entrenched firms. While SCRL doesn’t pay the dividend that its traditional waste management peers are known for, the firm’s recession resistance and growth trajectory make it an attractive buy right now.
Rising analyst sentiment only sweetens the pot this week.
Beauty retailer Ulta (ULTA) rounds out our list this week. The $6.3 billion firm owns approximately 450 big box stores spread across more than 40 states. That geographic footprint is significant. By spreading out a relatively small number of stores across a wide area, Ulta can focus on expanding is presence in regions that have already demonstrated the best performance. Those extra data points dramatically cut down the risks of expanding the firm’s scale.
Ulta is about as niche as retail gets. The firm stocks more than 20,000 different products at each store, giving customers selection that they won’t find in the beauty section of a more conventional retailer. And Ulta’s size also affords it some big advantages. By buying high-margin beauty items (such as brand-name fragrances) in scale, the firm is able to pass on considerable savings to its customers.
Ulta’s valuation is a little bit less beautiful. The firm currently sports an earnings multiple of 45, which means that investors are already pricing in some pretty substantial growth right now. The firm will need to live up to those expectations if it wants to keep a share price in the triple-digits.
That said, a debt-free balance sheet and plenty of cash on hand help to mitigate the pricey premium that investors are doling out for shares right now. So does the room for expansion that Ulta has here in the U.S.
To see all of this week’s Rocket Stocks in action, check out the Rocket Stocks portfolio at Stockpickr.
Twitter and become a fan on Facebook.-- 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.