BALTIMORE (Stockpickr) -- Stocks are holding onto Friday's big bounce, looking ready to rally on the start of a new leg higher in theS&P 500's trading range. We've been in a "buy-the-dips market" for the last two years now -- and Friday's price action marks the latest dip. Now it makes sense to be a buyer again.
To take full advantage of the up move in stocks, we're turning to a new set of "Rocket Stocks" that look ready for blastoff 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 268 weeks, our weekly list of five plays has outperformed the S&P 500's record run by 80.31%.
Without further ado, here's a look at this week's Rocket Stocks.
Up first is big bank Wells Fargo (WFC) . Wells has been a strong performer in 2014, rallying more than 14.7% since the calendar flipped to January. That's more than double the performance of the S&P 500 over that same stretch -- and Wells looks primed for more market beating returns to close out the year.
Wells Fargo is arguably the best behaved of the big-four U.S. banks, at least from a reputational standpoint. Wells had the strongest financial health of its peers coming out of the financial crisis, and it continues to lead its group today. Like other banks, Wells Fargo grew its footprint significantly during the financial crisis, picking up cheap deposits that it can use to lend out at higher rates. Those lending profits should increase in the coming years as pressure comes off of interest rates, and lending spreads can widen again.
While Wells Fargo has kept its bread and butter in retail and commercial banking, the firm has also been growing its fee-based businesses, such as wealth management. The addition of those new fee-based products and services provides a low-risk source of revenues at a time when banking companies are expected to have relatively low returns (and are priced accordingly). The financial sector has been one of the few corners of the market that's been on fire in the last month and change. For investors seeking big bank exposure, it's hard to beat what's on offer at Wells.
PepsiCo
Snack and beverage giant PepsiCo (PEP) is another blue-chip name that's been rallying better than the broad market in 2014. Pepsi is up nearly 13% since the start of the year, beating the S&P's 6.45% climb by a big margin. PepsiCo is more than just the world's number-two soda stock – it's also the world's biggest snack food company, thanks to a stout portfolio of brands that includes Lay's, Doritos, and Quaker. Revenues are split evenly between beverages and food.
PepsiCo is very much a global company, but that doesn't change the fact that its biggest business is here at home. Pepsi earns more than half of its sales in the U.S., exposure that's not completely surprising given the firm's big snack food sales. But that hefty domestic concentration also provides some growth opportunities at PepsiCo, where overseas growth (particularly in emerging markets) has the potential to move the needle on PEP's sales more easily than at peers.
There are some big benefits that come from PepsiCo's "Power of One" strategy, which finds synergies between the drink and snack food units. For instance, the firm is able to save money on distribution, and it's able to cross-promote new offerings more effectively. But recently, investor efforts from Trian Fund Management to break apart Pepsi's snack and beverage businesses have been getting attention from Wall Street.
While Pepsi's management is probably right that a single company provides better economies of scale, Trian is also probably right that a spin-off would unlock extra shareholder value. Either way that debate plays out, PEP is well-positioned to keep moving higher in the year ahead.
Halloween is right around the corner, and that spells profits for candy giant Hershey (HSY) . October is peak sales season for Hershey's products, and the firm estimates that 96% of shoppers buy Halloween candy each year. Hershey is the largest candy manufacturer in the U.S., with names like Reese's, Kit Kat and Twizzlers in addition to its popular namesake label.
Hershey sells more than 80 brands in 70 countries around the world, but its main business is very much still domestic: the U.S. accounts for 85% of HSY's candy sales. Likewise, the firm has the leading position of the chocolate market here at home, capturing a 44.5% share of the space. Considering the fact that candy is one space on grocers' shelves where cheaper private label brands haven't found success, Hershey's market penetration is hugely valuable today.
Financially speaking, candy is a pretty sweet business. HSY turned nearly 11% of every revenue dollar into profits last quarter, and the firm has a long track record of impressive cash generation. While Hershey carries approximately $1.3 billion in net debt on its balance sheet, that's a relatively low amount of leverage for a firm of this size. With rising analyst sentiment coming into shares this week, we're betting on this Rocket Stock.
Department store chain Nordstrom (JWN) is the poster child for a successful mall retailer. At the same time that other department stores are floundering, JWN is quietly cranking out profits for shareholders. Nordstrom is a high-end department store chain with 242 stores spread across 31 states. Half of those store locations are full-price mall anchor stores, and the other half are Nordstrom Rack discount stores.
Nordstrom's higher-end positioning makes it a bellwether for consumer discretionary spending – and also means that the firm's customer base is less price sensitive, and JWN can wring bigger margins out of each sale. The firm differentiates itself from the competition by focusing on the customer experience: new employees are taught to look at every customer interaction as a "story opportunity," and the sales results speak for themselves. The fact that Nordstrom operates its own off-price big box chain is another huge benefit. It's able to leverage its premium brand to unload slow-moving inventory from its flagship stores without ceding some of the margins to a third-party store.
Financially, Nordstrom is in good shape. The firm carries a tenable $3.1 billion debt load on its balance sheet that's largely offset by $772 million in cash. The firm's relatively small store base also means that there's considerable room for expansion here in the U.S. without running in to market saturation issues.
$13 billion software firm Autodesk (ADSK) is the biggest player in a lucrative corner of the tech world – it's the leader in computer-aided design and manufacturing. The firm owns AutoCAD, the incumbent software package for the industry for three decades, with more than 12 million users today. And the firm's transition into cloud-based offerings should come with even more upside in the quarters ahead.
Autodesk's business comes with a huge built-in economic moat: because the firm's products are very complex, and because engineers and designers dedicate so much time to learning its software, switching costs are very high. After investing considerable time and effort to gain expertise in one software platform, customers are unlikely to jump ship for any but the most serious reasons. Perhaps more important than sunk time, proprietary formats up the ante in switching platforms for existing projects -- you can't change software without the likelihood of problems converting your files.
But like other high-cost professional software applications, Autodesk's biggest challenge in years past has been piracy. The transition to the cloud makes even more sense in that context – not only can ADSK push new features more easily to cloud-connected devices, it can also verify users' software licenses far more effectively. New target demographics should help drive product growth in the next few years, especially as ADSK pushes to get educational copies of AutoCAD in the hands of students with the hopes of getting them proficient on its platform.
With rising analyst sentiment in ADSK this week, we're betting on shares.
Must Read: 12 Stocks Warren Buffett Loves in 2014
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.
Source:http://www.thestreet.com/story/12903604/1/5-rocket-stocks-ready-to-bounce-higher-this-week.html
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