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5 Rocket Stocks Worth Buying This Summer - views
BALTIMORE (Stockpickr) -- Summer doldrums? What summer doldrums? After Friday’s massive push higher, Mr. Market has made a pretty clear statement that Summer 2012 is the “Summer of Stocks.”
Don’t believe me? Just look at what equities have been doing this summer.
You see, I’m not just talking about Friday here, folks. While Friday’s massive run-up in big indexes like the S&P 500 was impressive, it’s just the icing on the cake -- the S&P is up almost 10% since the start of June. And the rally has been picture-perfect orderly. You don’t have to be a technical analyst to see just how solid this summer’s “shadow rally” has been, but for whatever reason, it’s not something that most people are talking about.
Days like Friday, when the S&P slingshotted more than 2% by noon, are a good wake up call for investors who haven’t been paying attention. And renewed focus on stocks in August could send some attractive buying opportunities shooting higher. That’s why we’re looking 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.
In the last 162 weeks, our weekly list of five plays has outperformed the S&P 500 by 75.85%.
With that, here’s a look at this week’s Rocket Stocks.
A bit more predictable than the summer doldrums for stocks is the summer increase in demand for Coca-Cola (KO) products, a popular subject of college economics classes. Of course, summer demand has nothing to do with why we’re looking at the stock today. Instead, it’s all about the upswing in analyst sentiment for shares of Coke.
Coca-Cola is the largest beverage company in the world. The firm’s products make up an astounding 3% of the 55 billion beverages served worldwide each day, a feat that’s accomplished through one of the most impressive distribution networks in the world. Coke’s network spans more than 200 countries, but there’s still room for growth in many of the less mature markets that the firm serves.
In more mature markets, the battle is all about holding onto share and taking it from top rival Pepsi (PEP), particularly in the new beverage offerings that Coca-Cola adds to its product portfolio each year. With the top spot on consumers’ drink shopping lists, an unmatched brand, and excellent consumer stickiness, Coke should continue to shine in 2012. In the shorter-term, we’re betting on shares this week.
Coca-Cola shows up on a list of 10 Century-Old Blue-Chips Still Earning Their Keep.
Texas-based oil and gas exploration and production firm Anadarko Petroleum (APC) is another name that made the Rocket Stock cut this week. Anadarko is one of the biggest independent E&P firms, with proved reserves of 2.5 billion barrels of oil equivalent.
As a pure-play E&P firm, Anadarko doesn’t have any of the other secondary businesses (like refining or retailing) that smooth out sales when oil prices are low, but also smash margins lower when crude prices are high. As oil creeps back up this summer, investors should see that as a good thing.
Anadarko does have diversification in where it drills -- in addition to projects in the U.S., APC owns offshore sites in places like the Gulf of Mexico and Cote d’Ivoire. The firm’s mix of oil and gas is also solid. Anadarko’s mix is nearly 50/50, albeit slightly skewed towards gas. That gives the firm the sort of positioning that supermajors have had to pay out big bucks to achieve on their own, and a big bull case for those who see higher nat gas prices on the horizon.
While the E&P business is capital-intense, Anadarko currently has a solid balance sheet with ample available liquidity. As speculation heightens over the next round of inflationary stimulus, exposure to commodity plays like APC is going to be valuable indeed.
Another commodity name we’re watching this week is Sothern Copper (SCCO), the biggest copper producer in the world with more than 146 billion pounds of the metal in its reserves. Southern Copper also owns molybdenum and zinc reserves, the former giving SCCO minor exposure to rare earths.
Copper has been the base metal equivalent of gold in the last few years (not just because they’re often found together), and Southern’s margins show it -- the firm owns Mexican and Peruvian mines that are able to yank copper out of the ground at rock bottom costs, and as a result, SCCO earns net margins approaching 35%.
And it pays a big chunk of that out as cash to shareholders: The firm’s dividend yield currently weighs in just above 5%.
That’s what happens when you have a big, concentrated owner that’s focused on providing value to shareholders; because around 80% of SCCO is owned by conglomerate Grupo Mexico, SCCO has historically kept a payout ratio of around 80%. We’re betting on shares this week.
SCCO was also featured recently in “6 Dividend Stocks With Strong Payout Ratios.”
2012 has been a stellar year for $22 billion regional bank stock BB&T (BBT). So far this year, shares of the firm have rallied more than 26%, easily outperforming the broad market. But there’s reason to believe that this big bank could have higher to run. That’s why it’s making our Rocket Stocks list this week.
BB&T is a bank whose 1,800 branches are centered on the South -- and unlike the big banks that grab the headlines each week, BB&T actually stuck to the banking business in the years leading up to the real estate bubble bursting. By keeping tighter underwriting standards than most, BB&T was able to skirt some of the biggest pitfalls of tumbling real estate prices in its home base region, and squeeze out double-digit net margins for its trouble.
During the crisis, BB&T used its size to snatch up assets of Colonial BancGroup from the FDIC at a bargain basement price and with limited risk. Now the firm is benefitting from the cheap deposits it picked up. That’s a big part of why shares have shot up so much in 2012. As BB&T continues to eke out improvements as the economy recuperates, investors should benefit.
Starwood Hotels and Resorts
Last up is Starwood Hotels and Resorts (HOT), the $11 billion hotelier behind upscale and luxury brands like Sheraton, St. Regis, Aloft and Westin. Starwood doesn’t own all of its hotels. Instead, only around 5% of properties show up on HOT’s balance sheet. The rest are merely managed by the firm on behalf of owners, a setup that takes the most substantial risks (like maintenance and real estate values) off of HOT’s balance sheet.
There are some downsides to that strategy, however. The tiny sliver of company-owned properties actually makes up the lion’s share of the firm’s operating earnings, a double-edged sword that Starwood will need to approach delicately. After 2008, investors are going to be a whole lot less willing to see high-end resort real estate make up a bigger chunk of HOT’s assets, but every investor wants bigger earnings from their portfolio stocks.
Starwood has at least been resolute in its strategy, embracing a fee-driven management model even if it’s not hurriedly selling off its crown jewel properties. Earnings and profits have been stair-stepping higher since 2008 -- and now, with rising analyst sentiment coming into the fold this week, we’re betting on shares.
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.