BALTIMORE (Stockpickr) -- Last week was a strong showing for the S&P 500. Fueled by bullish earnings and improving sentiment, the big index added more than 0.82% between last Monday's open and Friday's close. Think about it this way: Year-to-date, almost a third of the S&P's price performance has come from the last five trading sessions.
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Today, we're gunning for market outperformance with a new set of Rocket Stocks, our list of individual names that's primed to beat the market. We'll take a look at five fresh 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 296 weeks, our weekly list of five plays has outperformed the S&P 500's record run by 79.55%.
Without further ado, here's a look at this week's Rocket Stocks.
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Salesforce.com
Up first is Salesforce.com (CRM - Get Report), the $44 billion enterprise software firm. "The cloud" has been a major buzzword this earnings season. Scores of tech firms have been able to monetize their cloud services offerings like never before. But cashing in on the cloud is nothing new to Salesforce.
CRM is the largest provider of customer relationship management software in the public cloud, a delivery method that makes its namesake platform a convenient way for its 100,000-plus customers to run business applications that interact with their customer lists, doing everything from sending newsletters to tracking sales. Salesforce's software apps are mission-critical, and they're less expensive than more-customized in-house solutions. For those reasons, it's easy for companies large and small to justify paying the recurring subscription fees. Likewise, because CRM sells subscriptions rather than one-time software licenses, it's able to book consistent, recurring, sticky revenues month after month.
In recent years, Salesforce has grown to more than half a dozen different products, a family of solutions that can combine to form an integrated solution for customers, minimizing customer acquisition costs in the process. While CRM has historically been the poster child for a "growth at the cost of profits" business strategy, investors have been willing to tolerate delayed profitability in favor of scale, especially in this environment.
CRM isn't cheap on a valuation basis right now, but shares are up double-digits in 2015, and buyers are clearly controlling momentum right now. We're betting on shares this week.
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AbbVie
Pharma firm AbbVie (ABBV - Get Report) started off 2015 with a stumble, but shares have been making up for lost time ever since. Between the beginning of March and today, this $105 billion drugmaker has rallied more than 18%, beating the rest of the S&P 500 by a factor of six. And shares don't look likely to pump the brakes anytime soon here.
AbbVie earns about half of its profits from Humira, its blockbuster rheumatoid arthritis drug that falls off-patent in 2016. ABBV has been working hard to wring as much as it can from Humira, getting FDA approval for other autoimmune disorders such as Crohn's disease and psoriasis. But new indications or not, the firm realizes that it needs some income statement diversification, so it's been developing and acquiring its way to build out its drug pipeline.
ABBV is undergoing some big drug launches this year, giving investors a glimmer of hope that we could see another big commercial success to take some of the weight off of Humira's shoulders. Meanwhile, this stock currently pays a hefty 3% dividend yield at current levels that's well covered by cash in the bank. That $8.3 billion cash position covers more than half of AbbVie's current total debt load, a cushion of reserves that significantly reduces the risks of owning this stock in 2015.
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Seagate Technology
Computer storage stock Seagate Technology (STX - Get Report) tips the scales as one of the world's biggest manufacturers of computer hard drives. Last quarter alone, the firm shipped some 55 exabytes of storage capacity. That's been a double-edged sword in the last few years, because while demand for computer storage remains very strong, hard drives have become commoditized and margins have moved to solid state drives instead.
Today, hard drives contribute approximately 95% of Seagate's sales volume, which means that it's hard to overstate just how much exposure STX has to hard drives. But that's changing. Management wants solid-state storage products to add up to 80% of sales volume by the end of the decade -- and that should come with a margin bump, especially if demand for HDDs doesn't drop as quickly as demand for solid state products grows.
Because Seagate sells approximately 70% of its drives directly to original equipment manufacturers, it's well-positioned to help its OEM customers make the switch to more solid state drives. From a financial standpoint, Seagate is in good shape, with more than $3.3 billion in cash offsetting a $3.9 billion total debt load.
Seagate's firing on all cylinders so far in 2015. Look out for its share price to catch up this quarter.
United Rentals
Need to borrow a backhoe or a pressure washer? Better call United Rentals (URI - Get Report).
URI is one of the biggest heavy equipment rental chains in the U.S. and Canada, with more than 830 locations. URI's business model is built on flexibility. For industrial and commercial customers, the firm provides much-needed equipment capacity without the huge capital costs of leaving a forklift sitting idle in the corner of a warehouse for 10 months out of the year. And that arrangement makes a lot of sense for a lot of customers.
But there isn't much of a moat in that business -- and increased competition has been forcing margins down, so United Rentals has been working hard to court specific sub-industries with specialized tools that smaller equipment rental outfits don't have the scale to earn decent ROIs on. That's a big part of why United Rentals has been able to push its net margins up close to double-digits.
But sentiment has been shakier lately. Because one of URI's most lucrative niche customers has been the oil industry, the recent drop-off in oil prices has been a weight on this stock's share price. First-quarter earnings numbers indicated that United Rentals is generating revenues in the oil fields again, and that's a very good thing for investors.
With rising analyst expectations in shares this week, we're betting on this equipment rental stock.
Red Hat
Last up on our list of Rocket Stocks is $14 billion enterprise software stock Red Hat (RHT - Get Report). 2015 has been a pretty solid year for this North Carolina-based software firm. Year-to-date, RHT is up 11.2%, or better than four times more than the rest of the S&P. A big chunk of that outperformance came from the firm's fourth quarter earnings call back in March, and Red Hat's momentum isn't showing any signs of letting up this spring.
Red Hat's business is built on selling free software. More specifically, its flavor of the Linux operating system, which runs a big chunk of the world's servers and enterprise machines.
And while giving licenses away sounds like insanity from a business perspective, it actually makes a lot of sense. Because licensing costs are effectively zero and customization costs far less for a big enterprise IT department, Red Hat's value proposition versus a conventional server or workstation operating system is hard to argue with. Selling open source software does mean that competition is stiff, but Red Hat's expertise and software packages keep customers coming back. As a result, RHT owns more than 60% of the Linux server market.
The money is in the training and support -- and that's where Red Hat earned more than $1.7 billion last year. The huge installed base and big switching costs puts RHT in prime position to profit from the increase in IT infrastructure spending in 2015.
By Jonas Elmerraji
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