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Rocket Stocks: Baidu, Nike, Paychex - 10909 views
BALTIMORE (Stockpickr) -- February is already looking to be a strong month for stocks. Last week, the S&P 500 rallied an impressive 2.71%, and major indices continue to look strong this morning as the first full week of 2011’s second month kicks off.
There are a number of significant economic issues pressuring stock sentiment higher -- including the best unemployment numbers in nearly two years and strong corporate earnings -- and we could ultimately still be in the early stages of a broad-based rally right now.
How better to capitalize on that trend than with Rocket Stocks.
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For the uninitiated, our weekly Rocket Stocks list consists of companies with short-term gain catalysts and longer-term growth potential. Despite the strong market performance of the last week, our plays managed to do even better: in the last 90 weeks, our Rocket Stocks have beaten the S&P 500 by 76.91%.
This week, we'll continue our trend of looking at stocks with rising analyst expectations. On Wall Street, expectations can mean everything -- and stocks with rising expectations often benefit from increased buying pressures from institutions and retail investors alike. To find them, I run a quantitative screen that seeks out stocks with a combination of analyst upgrades and positive earnings surprises.
Here's a look at this week's potential plays.
Dubbed “the Chinese Google,” search giant Baidu.com (BIDU) is the dominant search site in the People’s Republic, with traffic that ranks the site as the sixth most-visited in the world according to internet traffic analytics from Alexa. As with Google, Baidu’s road to riches lies in paid search -- advertising to targeted users adjacent to their search results. It’s a strategy that’s proven incredibly effective; the company recorded revenues of CNY 7.9 billion in 2010 (approximately $1.2 billion at current exchange rates).
Baidu’s share of the search market is particularly compelling right now. While there is considerable competition in the search space in China, Baidu continues to be the leader in the industry by far.
That’s a position that was solidified following Google’s exit from the Chinese market. The American firm had previously been Baidu’s top challenger. Right now, that market share is singing an impressive growth story for the company; China’s Internet economy is still relatively nascent, and the potential for new lucrative revenue streams is very real.
Right now, the biggest challenge faced by Baidu is self-control. The company currently has more than $1 billion in the bank, and management is already looking to diversify its business by creating international divisions. The temptation to court expensive acquisition targets could prove painful for investors. Nonetheless, analyst sentiment is pointing us toward this stock in the short-term.
As of the most recent reporting period, Baidu comprises about 0.7% of Renaissance Technologies' portfolio as well as D.E. Shaw's. According to Karvy Global, it was one of the top 10 foreign tech stocks and top 10 emerging-markets stocks in 2010. Michael Shulman of InvestorPlace recently named it one of nine cult stocks investors should drop.
Nike (NKE) is another firm that completely dominates its industry. Even though competition is tough in the athletic apparel business, Nike’s offerings have earned a cult following in the company’s last four decades of production. Today, the firm is able to leverage its sheer size to get pricing power over its suppliers and retail customers. That bodes incredibly well for shareholders right now.
In total, Nike makes up nearly half of the dollar volume of inventory purchased by mall retailers such as Foot Locker (FL) -- a factor that gives Nike enviable influence over those who buy from them. That said, it’s unlikely that such vast control will last for long without considerable maintenance costs (advertising, research and development, and endorsements). The U.S. apparel market is far too saturated to allow complacency, particularly as brands such as Under Armour (UA) enjoy the upward momentum of consumer sentiment.
For Nike, the key to continued success exists outside of the U.S. and Europe, in the emerging-market nations that the company once turned to only for production. But burgeoning middle class populations in countries like China and India have swelled demand for Nike’s attainable status symbols, and the company is responding to that shift by focusing additional resources in the developing markets. We’re taking on the Nike trade as we start this week.
As of the most recent reporting period, Nike comprises 0.6% of Warren Buffett's portfolio and 1.2% of Chase Coleman's Tiger Global Management. It was one of Sterne Agee's 12 top consumer stocks, as well as one of Goldman Sachs' 11 best consumer stocks for 2011.
Jobs numbers were at the forefront of the economic news last week, as unemployment dipped to 9% -- the lowest level since April 2009. That’s hugely positive trend for Paychex (PAYX), a company that handles outsourced payroll and HR duties for small and medium-sized businesses.
Paychex has long been the biggest option for employers who didn’t have the expertise or resources to handle the growing morass of payroll paperwork that’s required for each employee. Today, the company has more than 500,000 customers -- a strategically important number given Paychex’s plans for growth.
The company has been courting its existing customer base to offer more comprehensive human resources services (like retirement plans, and hiring assistance), and ultimately generate a significantly higher chunk of revenue per customer. It’s a logical growth strategy, and one that should play out well into 2011 as hiring needs increase. Improvement in overall jobs numbers should also be beneficial to Paychex’s top line – because the firm gets paid based on the number of employees its customers have, falling unemployment should be a secular driver for growth.
Paychex also shows up in Renaissance Technologies' portfolio, at 0.5% of the total. According to Insider Monkey, it's one of 20 stocks analysts expect to dive the most, and according to Jake Lynch, it's one of the 30 worst-rated S&P 500 stocks for 2011 -- which could be a sign that it's on track to be one of the best-performing.
-- 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.