Investor sentiment has been struggling lately, as the big market indices remain underwater just weeks away from the end of 2015's third quarter. That's been a big driver of the increased stock market volatility we've seen in the last month or so. And investors are still split on whether Janet Yellen and company will opt to hike interest rates amid shakier economic conditions.
The good news is that despite the recent flux in the broad market, some individual stocks are still showing signs of strength again. To find the next batch of outperformers, we're turning to a fresh set of Rocket Stocks worth buying 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 315 weeks, our weekly list of five plays has outperformed the S&P 500's record run by 76.46%.
Without further ado, here's a look at this week's Rocket Stocks.
Facebook
Up first on our list this week is social networking giant Facebook (FB - Get Report) . In a year that's been characterized by poor market performance, Facebook has been a major standout, up more than 18% since the start of 2015. And as we head toward the final stretch of the year, Facebook's market momentum isn't showing any signs of slowing down.
Facebook is the most-visited website in the world, with more than 900 million daily users. All of the personal information that users input into their profiles gives Facebook a major edge in selling advertising. By using all of that data to provide targeted advertising, the firm has a powerful revenue generation tool at its disposal. Overall, advertising rates on Facebook are low, and that's a big opportunity, particularly as the firm expands its revenue generation overseas. For now, the U.S. provides a disproportionate share of ad sales compared to user traffic numbers.
From a financial standpoint, Facebook is in excellent shape. The firm currently carries more than $14 billion in cash and investments, versus only $149 million in debt. That balance sheet provides protection against economic hiccups, but it's not enough to make Facebook a "value stock" by any stretch of the imagination.
That said, as sales and profits continue to scale up at a fast pace, expect Facebook's share price trajectory to keep growing in kind.
That said, as sales and profits continue to scale up at a fast pace, expect Facebook's share price trajectory to keep growing in kind.
Home Depot
Even as the stock market's been ricocheting up and down, one asset class that's shown considerable consistency this year has been housing. And home improvement retailer Home Depot (HD - Get Report) has been a major beneficiary of that. This stock has managed to survive the S&P's rocky road in 2015, holding onto a double-digit climb since the start of the year. And along the way, Home Depot has made regular appearances on our list of Rocket Stocks. This week, we're adding it to the list again.
Home Depot is the biggest home improvement retailer in the world, with more than 2,260 locations spread across North America. Higher home prices means more equity for homeowners, and that's spurred a willingness to reinvest into what amounts to the biggest single asset for the vast majority of U.S. households. Home Depot benefits from the fact that home improvement stores face less substantial competition from online sellers than many other segments of the retail space do. Likewise, a high level of private label products has helped to keep Home Depot's profit margins industry-leading.
The firm's introduction of more service-based products, like product installation and light remodeling referrals, should provide an increasingly important source of high-margin revenues. More sales to home improvement service providers is another important revenue generator in the years ahead; a huge forecast increase in "do-it-for-me" home improvement spending is an important catalyst for Home Depot, and the firm has the geographic footprint and pricing power to benefit more than most.
Priceline Group
Priceline Group (PCLN - Get Report) has been another serial outperformer in recent months. This $65 billion travel giant has risen in large part thanks to smart bets on the growth of online travel bookings in emerging markets like China, and through increased focus on higher margin vacation packages and deals. Even though travel shopping is becoming commoditized, Priceline is finding ways to earn net margins in excess of 20% for its trouble.
Priceline got its start as a deep-discount travel aggregator, pairing bargain hunters with unsold hotel and flight inventory. That business benefits from a virtuous cycle effect: hotels sign up to sell inventory on Priceline because it has huge traffic numbers, and more travelers search for deals on Priceline because it has more hotels. As a result, the firm has more properties on its site than its competitors, giving it a meaningful economic moat at a time when lowest-price guarantees are leveling the playing field in the industry.
Likewise, Priceline has been building its edge by providing more value-added travel content (like that found on its Kayak subsidiary), which should help cement the firm's leadership position here at home. Even though competition remains fierce in the online travel agent space, Priceline keeps putting distance between itself and its top rivals -- and that's a trend that's still worth betting on in 2015.
Kroger
Kroger (KR - Get Report) is another big-name stock that's found standout success in an industry otherwise known for a lack of a competitive advantage. The firm is one of the leaders in the grocery business, with more than 2,600 supermarkets operating under the Korger's, Harris Teeter, Ralphs, and Fred Meyer banners, among others. Kroger also operates approximately 750 convenience stores and 325 jewelry stores, bringing its total store count to almost 3,800.
Even though Kroger's core grocery business is known as extremely low-margin and no-moat, the firm has gross margins that live deep in the double-digits with consistent growth rates. A big reason for that is huge private label penetration – the firm also manufactures about half of its private label items, giving it tighter control over quality and cost.
Gasoline is another big reason for Kroger's long-term success. The firm sells gas at nearly half of its store locations, driving traffic as a loss leader. While rivals have followed suit in many cases, many existing stores aren't able to retrofit gas stations onto their lots.
With rising analyst sentiment in shares of Kroger this week, we're betting on this retail giant.
With rising analyst sentiment in shares of Kroger this week, we're betting on this retail giant.
Realty Income
Last up on this week's Rocket Stocks list is Realty Income (O - Get Report) . Realty Income is one of the biggest real estate investment trusts in the country, with ownership positions in nearly 4,400 properties in 49 states and Puerto Rico. The firm's portfolio is primarily made up of free-standing single-tenant commercial properties.
Because Realty Income is all about income -- it pays a monthly dividend that adds up to a 5% dividend yield at current price levels -- it's a somewhat riskier bet ahead of this week's Fed rate decision. That said, the pressure that's been on shares of Realty Income because of a potential rate hike are likely overblown, especially as this stock sees the value of its huge real estate portfolio appreciate and its rents keep rising.
Like other real estate investment trusts, Realty Income rents its properties on a triple-net basis. That means that tenants are on the hook for insurance, maintenance, and taxes. For its efforts, Realty Income collects a predictable rent check, which provides a high level of stability over the firm's flagship dividend payout. Investors are overestimating the negative impact of a rate hike on Realty Income right now, and that makes it an interesting way to play the hype this week.
By Jonas Elmerraji
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