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5 Rocket Stocks Worth Buying This Week - views
BALTIMORE (Stockpickr) -- Eurozone stocks are getting shellacked this morning, the Euro Stoxx 50 down more than 2.2% after economic stats pointed to a quicker rate of economic contraction than investors had expected. And now that’s carrying over to U.S. stocks.
But Europe is still a bit of a red herring for the market’s motives. While most eyes are turned to the carnage taking place on EU equity markets, there are a few signals that things aren’t quite what they seem.
The first is what’s going on in the Russell 2000, a small-cap index of 2,000 U.S. stocks. Because the R2K is a small-cap index, it has a lot less exposure to Europe than larger multi-national driven indices such as the S&P 500. But the Russell has been underperforming the S&P since February; that suggests that the market lag isn’t EU-driven at all. Instead, it’s a matter of investors just looking to flip the “risk switch” into off mode.
The other factor is earnings. In spite of the anxiety that’s ramping up in the market right now, U.S. stocks are beating analyst estimates by the greatest margin since back in 2006. Of the 95 S&P 500 components that have reported their numbers so far this quarter, 85% have posted positive earnings surprise. And with 177 companies set to report their earnings numbers to Wall Street this week, EU drama could easy be overshadowed by corporations piling money onto their record-high piles of cash.
So to take advantage of the fundamental disconnect that’s taking place in the broad market right now, we’re turning to a new set of Rocket Stocks.
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 149 weeks, our weekly list of five plays has outperformed the S&P 500 by 80.34%.
With that, here’s a look at this week’s Rocket Stocks.
It’s been a good year for Intel (INTC) shareholders. So far in 2012, shares of the $138 billion semiconductor firm have rallied close to 14%, besting the broad market by a decent margin. Intel weighs in as the biggest chipmaker in the world, with 15.6% of the entire $311 billion semiconductor market.
That scale should continue to give Intel some major advantages over the competition in 2012.
When you drill down to the computer processor market, Intel’s share is even more stark. The firm manufactures around 80% of computer processors, giving Intel the ability to out-spend top rival ARM Holdings (ARMH) on research and development all day long. Still, Intel hasn’t been resting on its laurels; the firm realizes that the commoditization of the PC market is eventually going to impact its own margins in a negative way.
To resolve that, Intel has been working to claim a bigger chunk of the lucrative mobile device market, asserting its size to pour resources into partnerships with handset makers.
From a financial standpoint, Intel is in excellent shape. The firm carries a deep net cash position on its balance sheet and throws off considerable cash each quarter -- cash that fuels the firm’s ample dividend payout.
With a 3% dividend yield right now, investors should be loading up on shares.
Intel shows up on a list of 5 Chip Stocks JPMorgan Likes.
Home improvement retailer Home Depot (HD) has been a perennial favorite on our Rocket Stocks list for the last year and change, all the while climbing close to 40% on better-than-expected growth. HD is the biggest home improvement seller in the world, with more than 2, 250 stores spread across North America as well as locations in China.
There are two key drivers of HD’s performance right now. The first is consumer sales. While analysts had expected home improvement sales to ebb and flow with the real estate market, that’s not what happened. Instead, consumers continued spending on home projects (ostensibly to rebuild some equity following a major real estate drawdown), and driving sales to Home Depot’s top line.
The other factor was HD’s restructuring plan. The firm got too big for its britches in the years leading up to 2008, but management took advantage of the recession to restructure its business, close unprofitable stores, and improve its distribution lines. Today, the new Home Depot cuts a trimmer profile with deeper margins and an improved ability to adapt to changing economic conditions. The restructuring also left Home Depot’s balance sheet in much better shape, leaving the firm with a manageable debt load and adequate liquidity.
With rising analyst sentiment in shares right now, we’re betting on this Rocket Stock in April.
Tax day may have just come and gone, but Intuit (INTU) is still counting its cash. The firm, which develops popular financial software titles like TurboTax, QuickBooks, and Quicken, counts tax season as one of its biggest revenue drivers as tax filers flock to use its software to file their returns. On Friday, Intuit tempered analyst expectations by announcing an expected 11% growth in TurboTax sales for fiscal 2012.
Intuit has carved out an attractive niche in developing easy-to-use software for cryptic financial tasks like taxes, personal finances, and small-business accounting. Because the financial sector is dominated by services, it also provides Intuit with ample cross-selling opportunities -- upselling software customers to its loan business, or bringing QuickBooks users onto its payroll processing service. These complementary services drive deeper margins for Intuit, and they make life more convenient for the firm’s customer base.
A debt-neutral balance sheet and a large percentage of recurring revenues make Intuit look particularly attractive right now. While Intel does face some challenges from competitors in the tax space, it’s still the league leader. A lack of rivals in the small-business segment makes Intuit’s double-digit margins even more defensible in this environment.
Intuit shows up on a recent list of 15 Apple-Like Stocks That Could Bear Similar Fruit.
Bed Bath & Beyond
Bed Bath & Beyond (BBBY) has established itself at the best-in-breed retailer this year, climbing close to 20% as sales consistently outpace analysts’ expectations. BBBY has been a major momentum name in 2012 -- extra reason to take a second look at this $16.5 billion retail name.
So can BBBY keep it up in 2012? Sources point to yes.
Bed Bath & Beyond is a housewares retailer that owns Christmas Tree Shops, buybuy Baby and Harmon Face Value in addition to its namesake stores. In total, BBBY operates more than 1,150 stores spread throughout North America, with Bed Bath & Beyond making up the lion’s share of those locations. By embracing an innovative merchandising strategy, BBBY has been able to drive customers through its doors as a destination store, an enviable trait for any retailer.
At the same time, the firm has been looking outside its normal operating footprint for growth. Entry into Mexico, and Puerto Rico could spur faster growth rates for the firm.
One of the most impressive factors in BBBY’s growth story is how much debt the firm took on to build those thousand stores: none. The firm’s balance sheet currently holds $1.7 billion in cash and zero debt. Instead, the firm fuelled growth with cash flows from operations. That excellent financial condition means that BBBY hasn’t become particularly expensive despite its momentum stock status.
With analyst sentiment on the upswing this week, we’re betting on shares.
Quick service restaurant giant Yum! Brands (YUM) has turned out some impressive performance of its own in 2012: Shares of the $34 billion company have climbed 25% since the first trading day of January.
Yum! owns the KFC, Taco Bell, and Pizza Hut brands, totaling 38,200 restaurants spread across the globe. That makes it the biggest fast food company on the planet by locations.
Yum! was one of the first firms to embrace growth in China, and as a result, the firm owns an enviable foothold in the People’s Republic. That mature Chinese business means that Yum! is able to generate far greater sales per unit than most peers, and turn out larger returns on investment for shareholders. Even though there’s still considerable upside in Yum!'s Chinese business, the firm is now looking toward other emerging “frontier” markets to capture the growth rates that it saw at the start of its China expansion. Asia and Africa should continue to be two big focal points on that front.
As a franchisor, YUM can generates significant recurring revenues through licensing fees, while opting to open company-owned restaurants in some of the most attractive markets. That combination of revenue streams makes this stock look all the more attractive in this environment.
For investors looking for exposure outside the U.S., Yum! is hard to beat.
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.