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BALTIMORE (Stockpickr) -- As Mr. Market gets ready for the holidays, are investors going to be left with coal in their stockings at the end of 2011?
Historically, December is a very strong month for stocks -- in the last century, that seasonality relationship has left investors with gains 73% of the time. To date, this December hasn’t quite lived up to the norm; as I write, the S&P 500 is down around 2.2% on the month. The biggest reason for that is the abundance of drama-induced volatility that’s ravaged Wall Street this quarter.
Seasonality is strongest when investors are complacent and calm. This December, they’ve been anything but.
And with Christmas less than a week away, market participants are going to be facing low volume and investor ennui as the calendar year draws to a close. To succeed in this market, you’ve got to think outside of the box -- that’s why it makes sense to watch the 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 133 weeks, our weekly list of five plays has outperformed the S&P 500 by 82.89%. With that, here’s a look at this week’s Rocket Stocks.
As the largest retail pharmacy chain in the country, Walgreen’s (WAG) 7,800 stores reach more Americans than those of its rivals. At the same time, the firm is poised to benefit from one of the biggest trends in the pharmaceutical industry right now: the barrage of patent drop-offs that’s threatening drugmakers’ revenues for the next few years.
Combined, those factors should help Walgreen shake off the economic headwinds that are blowing its way.
Scale is Walgreen’s biggest advantage. Coupled with the patent drop-off issue (which should drive higher margins through the sale of generics), size could mean higher levels of profitability than peers. But what Walgreen’s peers lack in scale, they make up for in ingenuity. Rivals such as CVS Caremark (CVS) have added pharmacy benefits management to their repertoires to take a share of pharmacy sales on two fronts. Walgreen will need to keep up with new offers (such as in-store clinics) if it wants to continue its performance.
On the growth front, one major positive is saturation -- or rather the lack thereof. Despite Walgreen’s huge geographic footprint, the company still hasn’t reached saturation in the U.S., and it should be able to offer growth to investors for years to come. That’s helped by a healthy balance sheet position with ample room to spend cash on growing a capital base.
With analyst sentiment on the rise this week, we’re betting on shares ahead of Wednesday’s earnings call.
Coating and chemical maker PPG Industries (PPG) has been having a mixed year in 2011. While the firm’s revenue and profitability are bumping up against pre-recession highs, that fundamental success isn’t being reflected in shares. Even so, investors shouldn’t be ignoring this stock at current levels -- especially with a 2.82% yield.
PPG’s core coatings business generates nearly three-quarters of the firm’s sales, providing customers with the materials to paint and protect everything from airplanes and appliances to houses. Because PPG is the leader in coatings, the firm is able to generate high recurring revenues through industrial customers who get proprietary formulations direct from the source. That stickiness should help to buoy shares even as industrial numbers in the broad economy have failed to excite investors.
Because of PPG’s exposure to the industrial segment, the firm has seen an increasing share of its business coming from the emerging markets. Today, emerging sales make up more than a quarter of the company’s total revenues, a factor that insulates the firm somewhat from sluggishness in the Western manufacturing space.
Even though a growth-by-acquisition strategy has built a material debt load for PPG, ample cash generation capabilities more than offset it.
One big bet on PPG in the most recently reported quarter comes from Ken Fisher's Fisher Investments, whose 6.3 million-share position in the stock comprises 1.5% of its total portfolio.
Paychex (PAYX) is a payroll and HR outsourcing firm that services more than 500,000 small and medium business clients worldwide. While the company has historically thrived during more robust economic times (with low unemployment and higher interest rates), Paychex has proven to Wall Street that it’s more than capable of delivering strong performance in this environment.
As a jobs recovery play, Paychex is the best name out there.
Paychex has traditionally been a payroll company, providing services for small and medium-sized businesses that wanted to simplify the process of getting employees paid and taxes sorted. Because payroll revenue is driven by clients more than employment levels, the impact of the recession on Paychex’s revenue has been less severe than most expectations.
At the same time, the company has been growing its HR outsourcing business, upselling everything from 401(k) record-keeping to workers' compensation administration to its existing customer Rolodex.
The strategy has worked well; while margins have slipped by a few points over the years, total revenue eclipsed prerecession levels this past year. Paychex’s float income (the interest income it earns by holding clients’ cash until employees withdraw it) has been negatively impacted by record-low interest rates of the last few years.
An inevitable return to a higher-rate environment down the road should be a boon to this source of “free money” and consequently to net margins.
Paychex is also one of the top-yielding diversified services stocks.
It’s been a strong year for owners of Verisk Analytics (VRSK). Shares of the $7 billion risk analytics firm have rallied more than 15.6% this year, besting the performance of the S&P 500 by a broad margin. Verisk provides risk management data to insurance companies, healthcare providers, and mortgage lenders, helping firms to measure and reduce their exposure to a bevy of risks.
That’s an attractive business for one very big reason: in this environment of risk-conscious companies, Verisk can point clients to the dangers of not having its product. A subscription-based business model means that revenues are both sticky and recurring, resulting in hefty cash generation and high margins.
While its insurance servicing arm is the most mature part of Verisk’s business, the company has been pouring considerable resources into building out and maintaining its healthcare and mortgage risk databases. As additional regulatory eyes come onto both of those industries, managing risk through the products Verisk provides is going to become increasingly important.
With rising analyst sentiment, we’re betting on shares this week.
With nearly 1,700 stores under its banner, Safeway (SWY), one of TheStreet Ratings' top-rated food and staples stocks, weighs in as one of the largest grocery retailers in the country. And in spite of inflationary margin squeeze and hefty competition, it’s a business that’s remained reasonably strong in 2011.
Safeway has embraced the big changes in the grocery business, pushing out a successful private label initiative and a nearly $4.5 billion investment in outfitting its stores to compete with new rivals. While that’s resulted in a large debt load, it’s also kept shoppers pushing their carts through Safeway’s aisles.
Even though Safeway’s net margins are paper thin, they’ve been slowly trending higher for most of 2011 -- a testament to management’s ability to counter the creep of commodity costs against profitability. Dividends have long been an important part of Safeway’s story, and at 2.82%, they remain a compelling reason to own shares of this stock. (Safeway is one of the highest-yielding retail stocks.)
While capital investments haven’t been cheap for Safeway, ample free cash flow generation should keep the income payouts flowing to owners for the foreseeable future.
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.