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5 Rocket Stocks Worth Buying This Week - views
BALTIMORE (Stockpickr) -- No news is good news this morning, as Mr. Market tries to stealthily continue on the rally that’s been taking place below most investors’ radar this summer.
Monday’s session is kicking off to a fairly flat start, as often happens when there’s a lack of earth-shattering events that took place over the weekend. Across the pond, worldwide markets are looking calm and mixed, what can only be described as a good sign for investors here at home this morning.
The S&P 500 has been tracking higher since the start of June, range-bound in a supremely well-defined trend channel. Now, with shares approaching trend line resistance, it’s likely we’ll see some semblance of a pullback as the market bleeds off some overbought momentum.
But here’s the thing: The market doesn’t feel overbought right here; in fact, it still feels like investor sentiment is still skewed towards the bear side of things.
Believe it or not, that’s actually a good thing for stocks. It means that there’s still an abundance of dry powder sitting on the sidelines (largely in bonds, for instance) ready to be deployed into equities when investors feel ready again. That’s why we’re turning 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 163 weeks, our weekly list of five plays has outperformed the S&P 500 by 74.87%.
With that, here’s a look at this week’s Rocket Stocks.
Procter & Gamble
We’re starting out defensive today, with Procter & Gamble (PG). P&G is the quintessential blue chip stock. It’s massive, with a $182 billion market capitalization; it’s old, founded 175 years ago; and it pays out a hefty dividend yield of 3.37%. For investors looking for security and stability, the old wisdom is still the same: Buy blue -chip names like P&G.
But this stock could have more upside than expected thanks to rising analyst sentiment in shares this week.
Procter & Gamble is one of the world’s biggest manufacturers of consumer products. The firm owns a big portfolio of popular brands that includes everything from Tide detergent to Charmin toilet paper and Cover Girl cosmetics. An abundance of household names and massive scale means that Procter & Gamble can easily secure the most attractive slots on grocery shelves, and that the firm has some semblance of pricing power over its customers. Those factors have helped P&G generate massive free cash flows in the past few years, cash that the company can return to shareholders via its dividend.
Cost is key to P&G right now. Over the next few years, the firm expects to slash around $10 billion in costs from its income statement, a major initiative that should help to capture back some of the margins that Procter has lost from rising input costs.
Ultimately, this behemoth is a good core holding for most anyone’s portfolio -- especially with rates near zero and uncertainty still high.
It’s been a stellar year so far for Visa (V) shareholders. Since the first trading day of January, shares of the payment network have rallied more than 27%. Visa owns a global payment network that’s used by around 60% of the debit and credit cards issued worldwide. That scale is a big deal -- it means that merchants who accept credit cards need to accept Visa if they want to attract customers, and consumers looking for universal acceptance are more likely to pick Visa too.
That positive feedback loop is a big reason for the successes that Visa has had in the past few years.
Prescience is another. Unlike rivals like American Express (AXP), Visa doesn’t actually lend money -- it’s just the network. As a result, the firm doesn’t have any credit risk on its balance sheet, and it skirted the biggest black mark on credit card issuers during the Great Recession.
At the same time, its first-to-market status on debit cards meant that the company actually benefited when consumers eschewed their credit cards in favor of debit.
At this point in the game, a rising tide is lifting all ships. Gradually, worldwide payments of all sorts are switching from conventional cash and checks to payment cards, and as they do Visa and its biggest peers should all benefit.
With relative strength looking stellar in Visa right now, we’re betting on shares.
Tyco International (TYC) owns three very different businesses: ADT security, a flow control service that makes valves and pipes, and a fire protection unit. That disparity is exactly why the firm is splitting up next month, breaking apart all three businesses (in a logical move, ADT commercial will be combined with fire protection) in a decision that should ultimately unlock some value for shareholders in 2012. Investors who buy now get a piece of all three.
The biggest business unit is going to be ADT. The residential security division boasts large margins and extremely high customer stickiness (forced in part by long-term contracts for consumer companies) that helped Tyco keep its sales minimally impacted by the recession. That makes earnings risks minuscule and upside quite large, especially as the firm grows its market from security alone to additional services like home automation.
While I expect the split-up to unlock some significant value for shareholders, it’s not coming cheap. Management anticipates taking on approximately $700 million in charges related to the split, a number that’s on the hefty side of similar transactions.
Still, this isn’t Tyco’s first rodeo. The firm has a history of successful spin-offs that provided considerable upside for investors.
Not many companies can say that they’ve created multi-billion-dollar business by producing a free product, but Red Hat (RHT) can. The firm is one of the biggest providers of open source software, with its namesake enterprise Linux operating system the biggest piece of the empire. Red Hat’s product is essentially free -- and its consumer Linux distribution, Fedora, is completely free -- but the firm makes money through training, maintenance and tech support fees that it charges businesses.
That unique model has done well for Red Hat in the past. Because open source software typically leaves a much smaller cost for enterprise customers, it’s become a popular option for firms that don’t want to shell out hefty licensing fees for business machines like servers and workstations. While producing an open source software product does open the doors to more competition -- rivals can modify their software or simply offer competing support services -- most customers want to deal directly with the source, particularly if costs aren’t critically different.
To counter some of that competitive pressure, Red Hat has been expanding its focus to include so-called middleware and other enterprise software packages that customers previously got from Red Hat’s enterprise software competitors. By becoming more of a one-stop shop, RHT should be able to continue its impressive growth trajectory in 2012.
Shares are already up 38% this year, so while RHT is hardly a value stock at these price levels, this Rocket Stock should have more upside as a solid relative strength play.
Real estate investment trust Kimco Realty (KIM) has ownership stakes in around 1,000 properties worldwide -- more than 138 million of leasable square feet in total. Kimco primarily owns and invests in neighborhood shopping centers, a business that got hit hard during the Great Recession. But now, with commercial real estate bouncing back and a solidified balance sheet at KIM, this stock has room to run higher.
Unlike most commercial REITs, Kimco owns a large number of properties in joint ventures with other firms (around half of its property portfolio). Joint ventures are a positive for Kimco because the firm can deploy capital other than its own while collecting a management fee from its partners for its role in running those properties. While that does confuse the firm’s asset base a bit, it’s an added revenue source that most other REITs don’t have.
Essentially, real estate investment trusts are income-generation tools. Because Kimco leases properties with long-term triple-net contracts, the firm enjoys easily forecasted rent revenues without the earnings hiccups of maintenance, taxes or insurance costs. And since REITs are required to pay out the vast majority of income as dividends, KIM produces a solid 3.9% yield right now.
With analyst sentiment still on the upswing for Kimco, we’re betting on shares of this Rocket Stock right now.
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.