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5 Rocket Stocks Worth Buying in July - views
BALTIMORE (Stockpickr) -- Investors mashed the “risk on” button following last week’s European summit, sending the S&P 500 soaring 2.49% on Friday, providing investors with the biggest single-day gains of 2012. But here’s the kicker: Mr. Market is getting shoved higher again to start July. That bodes well for stock investors right now.
All told, last month was the best performing June in more than a decade, with the S&P climbing close to 4% for the month. The fact that investors are shaking off the stigma of the “summer doldrums” to buy equities is a good sign, particularly given some of the fear-driven headlines of the past few weeks.
And now, with earnings season set to officially kick off on July 9 with Alcoa’s (AA) second quarter conference call, stock buyers will have a barrage of new fundamental stats to weigh. Based on last quarter’s numbers, the S&P is around 20% cheaper today than it was at this time last year – and that discount may not last for long…
That’s why we’re turning to a new set of Rocket Stock names 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.
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In the last 157 weeks, our weekly list of five plays has outperformed the S&P 500 by 79.12%.
With that, here’s a look at this week’s Rocket Stocks.
Digital Realty Trustx
First up is tech REIT Digital Realty Trust (DLR). DLR is a real estate investment trust that owns 96 properties: mainly datacenters, internet gateways, and manufacturing facilities. In all, the firm owns more than 16.8 million square feet of leasable space.
Digital Realty’s niche focus gives it some big advantages. For starters, demand for internet datacenters and gateways continues to grow as data-driven services (like cloud storage) continue to grow in popularity. As long as firms need more virtual space to store data, they’ll also need more physical space to store servers; that’s space that DLR is uniquely qualified to provide. And as a result, switching costs are high for tenants who decide to lease space from Digital Realty.
Like most other REITs, DLR is effectively an income-generation tool. The firm enters into long-term triple-net leases with tenants, an arrangement that takes most of the risks off of DLR’s balance sheet and puts the onus on tenants instead. The result is a predictable income stream and a hefty 3.9% dividend yield right now. Watch for earnings on July 25.
Hotel and timeshare operator Wyndham Worldwide (WYN) is having a good year in 2012. Since the first trading day of January, shares of the $7.6 billion firm have rallied more than 39%. That may seem like surprisingly good performance for a hotel operator in this market, but Wyndham’s business model is surprisingly different. The key is its timeshare unit.
Timeshares make up around half of annual earnings, but the income that the timeshare business earns is generally fee-based, making it stickier and replete with much deeper margins than a typical hotel chain could expect to earn. And while hotel rooms tend to be more commoditized than ever these days (thanks to online travel sites that make comparisons extremely easy) Wyndham’s timeshares come with built-in barriers to entry from its sizable network.
On the other side of the income statement, most of Wyndham’s hotels are franchised, not company owned. That takes most of the risks and costs off of WYN’s plate, and puts them onto the franchisee -- an attractive tradeoff for a company like Wyndham, especially in this market, where investors are anxious about capital-intense business models that rely on consumer discretionary spending.
Like DLR, Wyndham reports second-quarter numbers on July 25.
Electrical component maker Cooper Industries (CBE) is showing off some solid performance of its own in 2012. So far this year, shares have climbed more than 25%. And statistically speaking, that relative strength is likely to carry over into the second half of the year.
Cooper isn’t going to be Cooper for long -- the firm is getting acquired by Eaton (ETN) for $72 per share. But the combined firm should have some attractive characteristics in the power management industry, particularly for Cooper shareholders. After all, the deal gives CBE owners claim to a combination of stock and $39.15 per share in cash. That stake in new Eaton and cold hard cash offers a nice combination of equity (to take advantage of the bounce in stocks) and risk-free (the cash portion).
The biggest industrial merger of 2012 is slated to close sometime in the second half of the year. With rising analyst sentiment in CBE combined with the terms of the merger, we’re betting on shares this week.
FedEx (FDX) has been benefitting from increased worldwide shipping volumes in 2012, buoyed by its enormous shipping network and the relative duopoly that the firm enjoys with top rival UPS (UPS). Even though the two package delivery firms get compared with one another frequently, they’re actually quite different. Unlike UPS, which integrates all of its shipping methods, FedEx has separate units for express shipments, ground shipments, and other modes of transport (such as freight and custom critical).
That separation has made FedEx’s operations stand out in recent years, and not in a good way. That’s because the firm’s dominant express unit was getting squeezed on margins at the same time UPS was churning out stellar performance from its league-leading ground operations. But now that FedEx Ground is delivering double-digits margins, things have changed enough that investors are willing to give the company the benefit of the doubt when it comes to financial performance.
Barriers to entry are exceptionally high in the package shipping business, something that DHL learned when it unsuccessfully tied to become a player in U.S. domestic shipping. That should keep FedEx’s place cemented as one of the critical shipping networks in the U.S.
More near-term, lower fuel prices should help boost margins for the firm’s massive truck and aircraft fleets.
Global payment firm MasterCard (MA) knows a thing or two about the network effect too. The firm operates the second-biggest payment card network in the world, and owns a handful of brands (such as Maestro and Cirrus) that help consumers pay for products and services more easily. As with shipping, the payment network business has high barriers to entry, and while there are more players in the industry, MasterCard’s 31% share of the market speaks to its concentration (along with Visa (V), the firm claims more than 90% of the payment card industry).
MasterCard benefits from the gradual shift away from cash and checks and towards electronic payments. So even though MA is the No. 2 player in the industry, rising tides stand to lift all ships as more and more consumers shift spending onto cards. And because MasterCard is the network, not the lender, the firm’s balance sheet is free from exposure to credit risks that could send banks reeling if defaults started climbing. Spending is the only thing that’s tied to MasterCard’s financial performance.
Back to that network effect. Because MasterCard is accepted almost universally, it’s a card that consumers want to carry. And in turn, it’s a card that more merchants prioritize accepting. The firm’s huge installed base should keep its spot secure for the foreseeable future.
As of the most recently reported period, MasterCard was one of Warren Buffett's stocks.
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.