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5 Rocket Stocks Signaling "Buy" This Week - views
BALTIMORE (Stockpickr) -- Despite a constructive week for economic data, investors are anxious about Mr. Market again. Last week, unemployment dropped to 7.7%, the lowest it's been in four years. At the same time, payrolls beat forecasts and the eurozone made some progress on its perennial debt issues.
But the lack of buying pressure in stocks over the last couple of weeks shows that investors are still breathing into a paper bag right now.
Yes, the fiscal cliff is a big piece of the puzzle -- the politically fuelled soap opera is likely to keep anxiety readings higher until it's resolved. That said, it's important to remember that equity investors aren't exactly in dire straits right now; the S&P 500 is currently sitting on gains of 12.7% on the year, market volatility is near this year's lows, and stock fundamentals support higher ground for early 2013.
With Christmas right around the corner, the traditional holiday push for stocks could catch a lot of folks by surprise. That's why we're taking a closer look at five new Rocket Stocks to start the 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. In the last 179 weeks, our weekly list of five plays has outperformed the S&P 500 by 74.5%.
Without further ado, here's a look at this week's Rocket Stocks.
Procter & Gamble
Blue chips don't come any bluer than Procter & Gamble (PG) -- the $192 billion consumer goods maker owns some of the most ubiquitous brands on consumers' shelves. Labels like Charmin, Tide, and Pantene are just a few of the brands in the $1 billion club, the group of 25 P&G units that generate more than a billion dollars worth of global sales each year. That's more giant brands than any other household products maker can boast.
P&G is a powerhouse in the U.S., but it's courting growth opportunities abroad. With burgeoning middle-class populations in emerging market countries, Procter has a big opportunity to increase its footprint by selling them on the kinds of products that have become mainstays here at home. That said, the firm isn't without competition -- private labels have provided a big challenge for the Cincinnati-based firm, as consumers have become more willing to eschew their favored brands for lower prices at the register. Procter's best defense is a good offense, and a massive advertising budget should help to remind consumers of why they should buy brand names.
The firm has been working on costs too. Procter & Gamble has been working on an initiative to reduce its costs by around $10 billion, a move that would expand the firm's already impressive margins and leave more flexibility in competing with price leaders like store brands. With rising analyst sentiment in this stock right now, we're betting on shares.
Wells Fargo (WFC) built up a reputation as the best of the big banks in the wake of the recession, and it's keeping that reputation in 2012; it's worth noting that Wells is the only one of the big four U.S. banks that's actually kept its share price in the black since late 2007.
Besides a less scary balance sheet and better shareholder stewardship, though, Wells Fargo isn't all that different from the rest of the big banks. It operates in the same businesses, ranging from retail and commercial banking to investments, and like its big peers, it ballooned in size in the middle of the Great Recession by buying a failing competitor. After 2012 brought a rally in most of WFC's peers, though, this stock looks less overbought at this point.
Extremely low interest rates are a double-edged sword for Wells Fargo. While rates near zero give the firm the ability to borrow at next to nothing, it also has to lend with only tiny profits baked in. As economic improvements start pushing interest rates higher in the long-term, Wells should be able to achieve some impressive profitability levels. Until then, investors shouldn't be complaining about the deep net margins WFC has been earning this year. That's why we're adding this bank to our Rocket Stocks list this week.
It's been a great year for Limited Brands (LTD) in 2012 -- shares of the $15 billion retailer have rallied close to 28% since the first trading day in January. Limited owns a portfolio of popular retail store concepts that include Victoria's Secret, Bath & Body Works, and White Barn Candle -- all names that are due for long lines this month as U.S. malls get swarmed on by consumers.
Limited owns an attractive space in the specialty retail business, with minimal overlap -- there's little in common between the firm's crown jewel Victoria's Secret apparel business and its Bath & Body Works, for instance. While LTD has significant exposure to U.S. malls, it's been working on expanding its reach abroad lately. That exposure should help to provide meaningful top line growth in spite of anxiety over consumer spending here at home.
Limited has been making some tough, but smart decisions in the last few years, opting to sell off its namesake The Limited unit to improve financial performance. While unloading a firm's eponymous arm is a tough move to justify, it's proving to be the right one. That's thanks largely to management ownership of shares; with LTD's founder still holding a material stake in the firm, management incentives are in line with shareholders' interests.
LinkedIn (LKND) is one of the more unlikely names on this week's list. While LinkedIn's class of tech IPOs was largely a disappointment, this social networking site for professionals has bucked the trend by delivering strong performance and strong profits in 2012. So far, shares have rallied more than 74% this year.
LinkedIn has been growing at a breakneck pace, boasting more than 130 million users at last count. The firm's niche as a social networking site for professional connections is critical -- it gives LNKD a direct line to generating revenue by offering premium tools to help find and fill jobs, and it has been attracting droves of job-seekers in the wake of prolonged high unemployment following the Great Recession. The ability to make revenue generation tie into the site's user experience (and not detract from it) has been a rarity for recent tech IPOs, and it's the key difference for LinkedIn that's kept sales climbing at a breakneck pace.
Financially, there's also a lot to like about LinkedIn. The firm has a debt-free balance sheet with almost $700 million in cash in its coffers. That hefty war chest gives management ample dry powder to keep growth engines spinning -- and it means that the firm is more easily able to ride out economic hiccups without putting value destroyers like share issuances or debt building on the table. With rising analyst sentiment in LinkedIn this week, we're betting on shares…
American Water Works
Sometimes, the best performance comes from the most boring companies. American Water Works (AWK) is a perfect example of that. The $7 billion firm is one of the largest public water utilities in the world, providing water service and wastewater to around 15 million U.S. and Canadian consumers. So far this year, shares of AWK have rallied almost 22% -- and that's on top of the firm's 2.7% dividend yield.
Like other utilities, American Water Works enjoys a government-sanctioned monopoly in most of its markets. The firm's water and sewage pipe infrastructure isn't replicable, and arrangements made with municipalities help to insulate the firm from the costs of maintaining them. Not all of AWK's revenues come from regulated businesses -- the firm also has a lucrative business using its expertise to design and build facilities for others, mainly municipalities and larger industrial operations. That nonregulated arm provides some nice diversification for the firm in places where it doesn't have a presence as a utility.
Not surprisingly, AWK is a favorite for income investors. The firm's dividend yield has diminished as its share price has climbed, but the uniqueness of the AWK's offering should keep investors interested in this stock. Still, at current levels, the 2.7% yield is a worthwhile payout for a secondary-income holding.
To see all of this week's Rocket Stocks in action, check out the Rocket Stocks portfolio at Stockpickr.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.