BALTIMORE (Stockpickr) -- Greece is yet again the center of attention to start the week today, following the country's surprise "no" vote against austerity measures. The referendum results are having a negative effect in Eurozone markets, and U.S. stocks opened lower this morning.
When stocks are getting pummeled by the news, it makes sense to focus on strength.
To do that, we're turning to a fresh set of "Rocket Stocks" worth owning in July.
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 305 weeks, our weekly list of five plays has outperformed the S&P 500's record run by 77.05%.
In the last 305 weeks, our weekly list of five plays has outperformed the S&P 500's record run by 77.05%.
Without further ado, here's a look at this week's Rocket Stocks.
PepsiCo
PepsiCo
Up first is snack food and beverage giant PepsiCo (PEP - Get Report). PepsiCo owns a big swath of the shelf space at your local grocery store. The firm's namesake Pepsi arm is the No. 2 beverage company in the world, and its Frito-Lay unit is the biggest snack manufacturer on the planet. The firm's huge portfolio of brands includes everything from Pepsi to Gatorade and Tropicana on the beverage front and Lay's, Doritos and Quaker on the snack side.
The duality of Pepsi's business has created a bit of a battle with key shareholders lately. Activist shareholders have fought to split the firm in two, arguing that there's value to be unlocked by breaking drinks and snacks apart. But management has been adamant about the economies of scale that PepsiCo generates by basically moving twice as much product as it would as two companies (revenues are pretty evenly split between the snack and beverage units).
Either way, Pepsi remains well-positioned in 2015. The firm's revenue has been decidedly U.S.-centric historically, with consumers here at home accounting for just over half of all sales. As growing middle class populations in emerging markets increase their soft drink and snack food consumption, Pepsi is on track to keep meaningfully moving the growth needle in the coming quarters.
With rising analyst sentiment in shares this week, we're betting on PepsiCo.
With rising analyst sentiment in shares this week, we're betting on PepsiCo.
O'Reilly Automotive
O'Reilly Automotive is the second-biggest auto parts store in the country, with more than 4,000 stores from coast to coast. The firm caters to both retail DIY consumers and to commercial auto shops, exposure that puts O'Reilly a step ahead of peers that have been slow to pursue the $60 billion market for independent auto shop suppliers. A series of large acquisitions over the last several years has given O'Reilly an enviable geographic footprint, all while keeping its balance sheet leverage down to a very tenable $923 million in net debt.
From a macro standpoint, O'Reilly is in an enviable position. The average age of the U.S. car fleet is older than ever before, andinterest rate hikes are on the horizon. That makes the economics of prolonging the lifespan of an existing vehicle increasingly more attractive than upgrading to a new one. That spending should make its way to O'Reilly Automotive's income statement in the quarters ahead.
Edison International
Electric utility Edison International (EIX - Get Report) supplies power to approximately 14 million residents in Southern California. That's an attractive business to be in, though not necessarily an easy one. For instance, while power demand is high and rates are attractive, the region's infrastructure is expensive to keep up -- so much so that the firm's merchant power generation business went bankrupt. That brouhaha didn't get resolved until last November.
But as those black clouds clear, Edison International is suddenly looking a whole lot more attractive. The firm is following the track of many other utility stocks (intentional or not), by moving more of its exposure to the regulated side of the business, trading off the potential for windfall profitability in good times in exchange for consistent performance and dividend creation. Now that Edison International is fully regulated, the surprises should be rare.
At this point, Edison still has significant investments to make in its aging energy infrastructure, but current power rates allow for attractive guaranteed rates of return on those big investments. Edison has underperformed the rest of the utility sector in 2015, but bullish sentiment is finally starting to come back into this $19 billion energy company.
With shares yielding right around 3%, the market may finally be satisfied with the haircut this stock has taken. Shares could be headed for higher ground this summer.
With shares yielding right around 3%, the market may finally be satisfied with the haircut this stock has taken. Shares could be headed for higher ground this summer.
Ingersoll-Rand
Diversified manufacturer Ingersoll-Rand (IR - Get Report) is showing a deceptively solid performance in 2015. With dividends factored in, Ingersoll-Rand's shares have paid out total returns of more than 7% so far in 2015, putting this $18 billion firm on track to generate returns in the mid-teens by the end of the year. That's some pretty meaningful outperformance for a year when performance has been pretty hard to come by.
Ingersoll-Rand owns a diverse collection of brands that includes Trane air conditioners, American Standard bathroom fixtures, Club Car golf carts, and its namesake line of industrial equipment. Trane is Ingersoll-Rand's biggest unit, at more than 60% of sales – with housing data coming back strong this year, that positioning should pay off for shareholders. The firm's brands are the league leaders in their respective niches, resulting in a firm that's stronger than the sum of its parts.
Even though interest rates are likely to turn higher in the next 12 months, they still remain extremely low compared to historical levels, and that's a good thing for Ingersoll-Rand's capital-intense product lines. It's true that Ingersoll-Rand's business lines tend to be cyclical, but with the Fed likely to be slow to hike rates, the business cycle should get prolonged this time around, boosting Ingersoll-Rand's profitability in the process.
Ingersoll-Rand isn't hitting home runs in 2015, but investors should be looking for another single in the second half of the year.
Ingersoll-Rand isn't hitting home runs in 2015, but investors should be looking for another single in the second half of the year.
Lululemon
Last up on our list of Rocket Stocks is Lululemon (LULU - Get Report), the $9.2 billion athletic apparel stock. 2015 has been a building year for Lululemon. After pretty rough performance last year, shares are finally growing into their valuation this year, resulting in nearly 17% upside since the calendar flipped to January. Even though competition may be stiff in the athletic apparel business, Lululemon is leveraging a powerful brand to compete against the incumbents -- and it's winning.
One of the really appealing parts of Lululemon's growth story is the fact that this company has been able to finance its expansion through equity and earnings, not debt. Instead the firm carries $655 million in net cash on its balance sheet, a material risk-reducer for investors who opt to buy.
With rising analyst sentiment building in Lululemon this week, we're betting on shares.
By Jonas Elmerraji
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