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5 Rocket Stocks to Stomp the S&P in 2014 - views
BALTIMORE (Stockpickr) -- Yes, 2013 was a great year to be a stock investor. All told, the venerable S&P 500 Index gained 29.6% last year, in the best calendar year for the big index since all the way back in 1997.
But one small subset of stocks made the S&P's performance look anemic last year. I'm talking about the Rocket Stocks.
While the big index turned out impressive gain numbers for the year, our concentrated set of Rocket Stocks beat the S&P by 11.6 percentage points, gaining 41.2% for the year. That's material outperformance -- and they're set to drive bigger gains in 2014 as well.
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 231 weeks, our weekly list of five plays has outperformed the S&P 500 by 84.81%.
Without further ado, here's a look at this week's Rocket Stocks.
$18 billion asset management firm Blackstone Group (BX) is coming off the heels of a blockbuster year for shareholders. In the last 12 months, Blackstone has rallied 91%, besting the S&P's impressive returns last year by a factor of three.
That's not hugely surprising, though. As an investment advisory firm, Blackstone is basically a leveraged bet on the public and private equity market. That means that the firm is positioned to continue to outperform in 2014.
Blackstone offers its clients exposure to a wide array of alternative investments, ranging from private equity funds to real estate and hedge funds. That non-traditional asset base is the reason why BX outperformed other investment firms by such a wide margin. As correlations across traditional investment options remain high, high-net-worth and institutional investors should remain willing to shell out more cash for the alternatives that Blackstone provides.
Scale matters a lot for Blackstone. Because the firm is one of the largest private equity names in the world, with around $250 billion in assets under management, it's able to orchestrate big-ticket deals that smaller names can't. The firm's expertise in guiding privately held portfolio companies has also borne a lucrative advisory business, a high-moat business that newcomers can't simply hold out a shingle and expect to succeed in.
With rising analyst sentiment in shares this week, we're betting on Blackstone.
Hard-disk maker Western Digital (WDC) is another name that enjoyed market-crushing momentum last year, dishing out 94% gains to investors who bet on the computer storage stock this time last year. The computer storage business still has some enormous tailwinds pushing at its back right now, and those should continue to propel the world's biggest hard drive maker to new highs in the year ahead.
Worldwide, demand for storage is increasing like never before. That's because, today, consumers carry around devices that record HD video and photos, store data-intensive applications, and store it all in the cloud. That means that storage is critical both on consumers' local PCs and on the server farms that continue to sprout up.
For conventional hard drive makers, solid state drives represent the future. For now, their costs are keeping SSDs from all but the most performance-demanding tasks, but eventually it's likely they'll supplant HDDs as the standard storage medium. While that's been a threat to firms like WDC, recent acquisitions like STEC should help to boost Western Digital's SSD capabilities.
Western Digital currently has a solid cash position: around $2.5 billion net of debt as of the most recent quarter. And that number is likely to be closer to $3 billion by the time next quarter rolls around. That's enough dry powder to pay for around 12.5% of WDC's current market capitalization right now, a fact that helps reduce the risk in shares after such a big run higher.
If WDC can continue to use cash in a smart way, investors stand to keep benefiting.
Industrial manufacturer Ingersoll-Rand (IR) owns a diverse collection of brands that includes Club Car golf carts, Trane air conditioners, and its namesake line of industrial equipment. Until last quarter, IR also owned a big security business that were spun off as Allegion (ALLE), a separate $4.4 billion firm. While the deal removes Ingersoll-Rand's highest-margin business, it should give the firm considerable wherewithal on its balance sheet in 2014.
Ingersoll-Rand owns market leading positioning in most of its businesses. After the security unit spinoff, IR's exposure to HVAC equipment has increased considerably, growing to 60% of revenues. With commercial and residential construction enjoying new life this year, IR should benefit in a big way as demand stays at the high-end of its recent range.
While Ingersoll-Rand's business is certainly cyclical, the firm has been battling its cost structure to keep margins high. That'll be particularly important now that the high-margin security business is off the books.
With rising analyst sentiment in shares of this Rocket Stock in January, we're betting on shares.
Despite the residual warts from the financial crisis of 2008, credit rating agency Moody's (MCO) still boasts a lucrative, high-moat business. As one of the "big three" ratings firms, Moody's controls around 40% of the market for debt ratings, a position that gives the firm ample cross selling opportunities among its user base. With interest rates sitting near zero right now, debt issuances are up as firms make the prudent choice of refinancing debt loads at higher rates. That gives Moody's a steady stream of business to keep up with now.
The regulatory and public scrutiny that Moody's faced in the wake of 2008 provided some good lessons for management, making it much less likely that MCO will make the same mistakes twice. Moody's business extends beyond debt ratings; like its peers, the firm also sells research and quantitative databases, products that (like ratings) are capital-light and produce impressive margins. In many ways, Moody's dominance has held because it's one of the only games in town, and that edge is a big plus for investors.
Financially, Moody's is in good shape. The firm maintans a balance sheet that's nearly debt-neutral, and the firm operates in a high net-margin business with few major capital costs.
As momentum drags shares of MCO higher in 2014, investors should continue to get rewarded for their patience.
As I write today, the average age of a car on the road here in the U.S. is older than it's ever been before. That's providing some big opportunities at auto parts retailer AutoZone (AZO). As drivers seek to extend the lives of older vehicles, AZO's parts business should continue to enjoy big organic growth. AutoZone's network spans around 4,700 stores here in the U.S. and another 321 in Mexico, making it the largest aftermarket car part seller in North America.
AutoZone has size advantages over its peers. That means that it's able to negotiate better pricing deals with its suppliers, and it means that it's able to generate bigger margins on its private-label parts business such as Valucraft and Duralast. The firm's business isn't relegated to do-it-yourselfers either -- AutoZone also boasts more than 3,000 commercial locations within its retail stores, providing parts for repair shops and service stations. While margins on the commercial side of the business don't match the profitability that AZO enjoys on the retail side, volumes help make up for the shortfall.
Mexico is a big growth driver for AutoZone, particularly because the trends of lengthening cars' useful lives are magnified down there due to a much older national car fleet. Expansion into other Latin American countries could provide much higher growth rates than the firm's current earnings multiple implies.
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, 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.
Follow Jonas on Twitter @JonasElmerraji