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5 Rocket Stocks Worth Buying in June - views
BALTIMORE (Stockpickr) -- 3.02%. That’s how much ground the S&P 500 lost in last week’s four-day run, most of it over the course of Friday’s brutal trading session. So, with panic selling sending June off to a less than auspicious start, does it still make sense to be a stock buyer right now?
It does if you stick to the “Rocket Stocks” . . .
In spite of the selling that sent the S&P down around 2.4% on Friday (and sent other indices like the Nasdaq Composite down closer to 3%), there are still some pretty compelling factors in favor of upside in stocks. Solid fundamental performance still coming from equities and the end of the Fed’s Treasury-buying spree are two big ones.
The first suggests that stocks are starting to look even more cheap as share prices tumble on top of record corporate profits and more than $1 trillion of cash held in corporate coffers right now. The second factor points to Treasuries becoming less of a “flight to quality” asset in 2012 -- if the Fed-induced buying pressure behind Treasury prices eases up, investors are going to have a lot of cash to deploy in the equity market.
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That’s why we’re turning to a new set of Rocket Stock names worth buying in June.
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 153 weeks, our weekly list of five plays has outperformed the S&P 500 by 83.75%.
With that, here’s a look at this week’s Rocket Stocks.
In spite of Mr. Market’s selling pressures this year, Abbott Labs (ABT) is having a strong run in 2012. Shares of the $95 billion drug and medical device company have rallied more than 7.6% since the first trading day in January, in addition to a hefty 3.4% dividend yield that the firm currently pays out. Don’t think that this firm’s blue-chip posturing means that it’s stationary -- quite the opposite, in fact: Abbott plans to split its pharma business away from the rest of its operations, creating two publicly traded firms in the transaction. And investors who buy now get a piece of both parts.
Abbott’s split is a big deal for investors. The move should give the market a better idea of the individual parts that make up ABT’s business, and as a result, it should extract more value than the firm’s market capitalization currently recognizes. The way management is splitting the firm makes a lot of sense; pharma is a more stable business, albeit one with the big black clouds of patent expirations floating overhead.
The firm’s other diversified medical businesses include medical devices and nutritional products. While those units don’t sport the margins or consistency of pharma, they do skirt the patent drop-off concerns of Abbott’s pharmaceutical business. With rising analyst sentiment in shares and a major catalyst in the split-up, investors should be paying attention to Abbott in 2012.
While everyone was watching Friday’s jobs numbers, there was another stat that wasn’t getting much attention: consumer spending. Spending levels have risen approximately 4% in the last year, providing fuel for revenue at American Express (AXP), the $61 billion financial services company.
American Express may not be the biggest payment card network in the world, but it is the most lucrative. The firm’s higher-end positioning means that it captures a higher dollar volume of spending than its more mass-appeal rivals. And because AXP’s model is spending-driven rather than lending-driven, the firm actually benefits by having customers who are less willing to rack up big credit card bills. Amex’s brand is the strongest in the business, built off of the idea of superior customer service at a price -- that should continue to lure consumers over to its network, especially as the charge card becomes an attractive alternative to using traditional credit products.
Amex’s spend-centric model doesn’t mean that it’s immune from credit risk -- quite the contrary. The firm carries consumer balances from one month to the next, and its credit card products are nearly identical to those from rivals. Delinquencies are something that management will need to keep a close eye on in 2012. At the same time, an increased presence of Amex cards issued by partner banks should grow the firm’s spend volume while removing some of that credit risk from American Express’ balance sheet.
That’s an attractive shift in positioning in 2012.
Enterprise Products Partners
For income hungry investors, it’s hard to beat what’s going on at Enterprise Products Partners (EPD) right now. This Houston-based master limited partnership was essentially designed to generate tax-efficient dividend income for investors, paying out the proceeds of its natural gas pipelines and processing facilities to shareholders in the form of a 5.3% dividend yield.
As U.S. natural gas production continues to ramp higher, EPD is well positioned to take advantage of the trend, even if natgas prices remain at major lows right now. After all, with the firm cranking out a high level of profitability at these levels, the upside outlook becomes pretty significant if natural gas prices climb higher and there’s more room for EPD’s margins in the price.
Size has advantages in the MLP business. Because this class of firms has to pay out the vast majority of its income to shareholders in order to hang onto its tax-free status, MLPs often lack the liquidity that we’d see at comparable corporations. Not so with EPD -- the firm currently sports close to a billion dollars in cash and investments, and it’s got plenty of dry powder to draw from in the capital markets, where size also matters. That yield is hard to argue with, especially because it’s easily covered by operations, and because 10-years are currently yielding a pitiful 1.45% right now.
Eli Lilly & Co.
Another high-yielder on this week’s Rocket Stocks list is Eli Lilly & Co. (LLY), a $46 billion pharmaceutical firm. Lilly yields 4.88% right now, a payout that partly reflects investor anxiety about patent losses down the road.
Lilly is no stranger to blockbuster drugs; the firm’s patent list includes names like depression drug Cymbalta and ED pill Cialis. A hefty pipeline of attractive late stage therapies bodes well for investors in the next few years too. Lilly has historically done well in the treatment of diseases like diabetes and cancer, positioning that puts the firm ahead of the line in coming out with new therapies for other related diseases based on its existing therapies. Even though the early stage pipeline is somewhat weaker than its Stage III names are, Lilly has plenty of time to build out that part of the business.
It also has the cash to do it. Lilly has close to $10 billion in cash and investments, a position that makes up around 20% of its market capitalization at last count -- that’s sort of cash position makes Lilly’s business look cheap right now, and investors would do well to take a close look at this stock, especially as it continues to pay out its dividend using proceeds from operations.
Last up this week is U.S. Bancorp (USB) a regional banking stock that has operations in half of the states in the U.S. That huge geographic footprint makes USB one of the biggest regional banks in the country, a classification that’s shown investors much deeper margins and better risk management skills than their bigger counterparts. And USB is no exception to that rule.
One major reason to like USB is the fact that it generates a double-digit chunk of its revenue from fees. The firm generates service revenue from its credit card, wealth management, and payment processing units. Fee-based revenue is generally recurring, and the company tends to court stickier customers than traditional banking operations could hope to.
At this point, though, most of USB’s revenue still comes from traditional retail banking. But those fee-based businesses also tend to attract hefty deposits, giving USB a nice source of cheap capital that it’s able to lend out for attractive margins. The result is huge profitability: Around 25 cents of every dollar USB brings in goes straight to its bottom line. No big banks can boast that sort of financial performance, or the balance sheet transparency of a more traditional banking operation.
With rising analyst sentiment building in shares this week, we’re betting on USB.
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.