This week, the Federal Reserve is in the spotlight, as investors brace for the possibility of the first interest rate hike in almost a decade. But while there's certainly no shortage of market-moving volatility this week, some stocks are looking predisposed to outperform in this environment.
I'm talking about the "Rocket Stocks."
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 327 weeks, our weekly list of five plays has outperformed the S&P 500's record run by 78.85%.
Without further ado, here's a look at this week's Rocket Stocks.
Microsoft
Up first on the list today is technology giant Microsoft (MSFT - Get Report) . Despite a tough year for stocks, Microsoft has managed to deliver some standout performance in 2015, up more than 16% since the calendar flipped to January. But don't worry if you've missed out on Microsoft's rally so far -- that bullish momentum looks likely to carry over into the new year.
Microsoft's biggest business today is software. The firm's Windows operating system and Office productivity suite still make up the lion's share of Microsoft's sales today, particularly on the commercial side, which tallied nearly 60% of revenues. A big installed base gives Microsoft some important growth opportunities, particularly now that Microsoft has announced big bets on cloud computing and mobile apps. The firm's Azure cloud services should be a big growth driver over the coming years, but the core software licensing business isn't going anywhere in the meantime.
Financially, there's a lot to like about Microsoft. The firm currently carries approximately $72 billion in net cash and investments, enough to cover about 16% of Microsoft's shares at current levels. That big cash cushion represents a serious risk-reducer for investors who are thinking about taking a stake in Microsoft here.
Public Storage
Public Storage (PSA - Get Report) is another high-profile stock that's enjoyed some market-crushing momentum in 2015. Since January, shares of this $42 billion self-storage REIT have managed to rally more than 30%. And while the threat of higher interest rates has been wearing on many REITs this winter, Public Storage's relatively modest 2.8% yield means that it doesn't face quite as much pressure from higher rates.
Public Storage is one of the biggest self-storage operators in the world, with ownership in more than 2,000 facilities in the U.S., plus another 200 in Europe. Additionally, the firm has a roughly $1 billion stake in PS Business Parks (PSB - Get Report) . Demographics offer some long-term tailwinds at Public Storage. As Millennials, the largest generation in history, begin buying homes and enter the family formation phase of their lives, they're boosting demand for storage facilities. That's particularly true around hip urban areas where real estate is expensive and Public Storage has properties.
Rising interest rates could potentially be a good thing overall for public storage. That's because they give the firm the justification to reset its short-term storage unit leases at higher rates more quickly than its cost of capital. Historically, this stock has relied on debt as a last resort, instead financing much of its growth through much more flexible preferred shares. With rising analyst sentiment in shares of Public Storage this week, we're betting on this Rocket Stock.
Kroger
Year-to-date, shares of Kroger are up more than 27% in 2015, and that momentum isn't abating this winter...
Kroger has unique, hard to replicate features at its stores that drive traffic. The firm sells gasoline at approximately half of its locations, offering shoppers an important loss leader that adds punch to its loyalty card. Likewise, the firm enjoys strong margins, driven by the fact that around one in four products Kroger sells is a higher-margin store-brand offering. Even better, Kroger manufactures almost half of those private-label products itself through a network of 37 company-owned food processing plants, giving Kroger much better visibility over the cost and quality of the products it sells.
The firm's exposure to higher-margin businesses like jewelry and convenience retail helps to give it some big advantages over its traditional grocery peers. Strong earnings propelled Kroger to new all-time highs earlier this month; buyers are clearly in control of shares right now. Look for Kroger to carve out some new highs before the year ends.
Moody's
The recent rout in fixed income pricing has served as a selling point for credit rating agency Moody's (MCO - Get Report). Bond investors are realizing that any tools they can use to get better transparency over risks are worth paying for. As the threat of higher interest rates spur corporations into issuing debt while costs remain cheap, Moody's stands to benefit in a big way.
As one of the big three credit ratings agencies, Moody's owns a valuable chunk of the overall market for grading debt. More specifically, the firm controls an estimated 40% of the ratings business. Size and reputation matter for credit agencies, and the huge scale of Moody's gives it an appreciable advantage over new potential rivals. The firm has been expanding its menu of offerings in recent years, providing more research services and risk management tools to diversify the firm's revenues away from the debt-grading world.
A relatively asset light business model makes that expansion particularly attractive for Moody's, generating net profit margins approaching 30%. The firm's balance sheet is well-positioned, with just over $1.1 billion in net debt. With rising analyst sentiment coming into shares of Moody's this week, we're betting on this Rocket Stock.
Palo Alto Networks
Last up on our list of Rocket Stocks is Palo Alto Networks (PANW) . This $16 billion cybersecurity stock has been on a tear in 2015, rallying more than 50% since the first session of the year. And as the stakes continue to get higher in the IT security arena, so too should the amount of dollars up for grabs at Palo Alto Networks and its peers.
Palo Alto Networks develops and sells firewalls, endpoint protection and cloud security services. Revenues are nearly evenly matched between product and service dollars, an attractive mix given the fact that service revenues tend to be recurring in nature, and not just one-time sales. Palo Alto was one of the first cybersecurity companies to introduce next-generation firewalls to enterprise IT customers, and the firm continues to benefit from that first-to-market status, even as competitors introduce their own next-gen firewall products.
The firm's focus on bringing new products to market should be successful, especially considering the credibility Palo Alto currently enjoys with its big installed base. While Palo Alto Networks hasn't been profitable to date, but that fact doesn't seem to be bothering investors (or momentum in shares) this year. Investors get their next sneak peek at Palo Alto's financials in late February.
By Jonas Elmerraji
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