5 Rocket Stocks to Buy for End-of-Year Gains

It's officially the final stretch of 2015. After today, just 17 trading sessions stand between us and the end of the year. And that means that the clock is ticking for the big market averages to close the year on a high note.

So far, the big S&P 500 index has only managed to move 1.59% higher from a price standpoint, a performance number that hops up to 3.6% total returns once dividends are factored in. Assuming 2015's books slammed shut today, 2015 would be the second-worst year for investors since the market crash of 2008 -- and the third worst since all the way back to 2002.

No, that's not a shining endorsement of being a stock market investor right now.

But there's a silver lining to this year's weak returns. Despite the do-nothing performance in 2015, the S&P is only 2% shy of hitting all-time highs this December. That gives this market plenty of time to give investors something to show for owning stocks over the next dozen-and-a-half trading sessions.

To take full advantage of that, we're taking a look at a fresh set of Rocket Stocks to buy for gains 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 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.

Bank of America

Up first is banking giant Bank of America (BAC - Get Report) . BofA has seen a pretty lackluster year itself, moving about 0.5% lower since the calendar flipped to January. With dividends factored in, it swings to a 0.7% gain. But Bank of America's best days could be ahead of it as we steam toward 2015, and investors are starting to realize that fact this winter.

Bank of America is one of the biggest banks in the world, with more than 4,700 branches worldwide and 48 million individual consumer and business relationships. Size matters in the banking business, and BofA's huge scale means that it can raise deposits cheaply and spread costs across a bigger base of assets than most rivals can. Likewise, that big scale creates equally big cross-selling opportunities as Bank of America leverages its huge customer Rolodex to cross-sell everything from credit cards to brokerage through its Merrill Lynch business.

After a seemingly endless stream of nasty surprises for Bank of America shareholders, the firm seems to have finally put the big legal liabilities related to 2008's financial crisis behind it, clearing the way for profitability that's more in-line with peers. Likewise, with market participants overwhelmingly betting on a rate hike from the Fed in December, BofA is well-positioned to start seeing its margins edge upward once again.

With rising analyst sentiment in shares this week, Bank of America makes our Rocket Stocks list.

Home Depot

Home Depot (HD - Get Report)  has been a stellar performer in 2015, up more than 28% since the beginning of the year. One of the biggest tailwinds in the Home Depot story has been housing, which has enjoyed a strong push nationwide this year. As homeowners watch their home equity balances creep higher, they're becoming more willing to invest in pricier home improvements, boosting business for home improvement retailers such as Home Depot.

Not all retailers benefit equally from the trend, however. With nearly 2,270 locations across North America, Home Depot is the largest chain in the industry, raking in about 20% of the entire retail market. Being big means that Home Depot can keep per-unit distribution costs low, something that the firm has been focusing on in recent years. Likewise, scale means that Home Depot can more readily take advantage of introducing private label brands to its stores, boosting margins in the process.

Finally, the firm has taken major strides to introduce more service revenues to its product mix, pairing consumers with contractors -- and providing both with Home Depot products. That service arrangement doesn't just boost sales, it also drives high-margin revenues, a major factor in Home Depot's nearly 8% net profit margins last quarter.

As I write, Home Depot is hovering at all-time highs; buyers are clearly in control of this stock's momentum here, and we're joining them this week.

Costco Wholesale

Another big box chain that's making our cut this week is Costco Wholesale (COST - Get Report) . Costco is the third-largest retailer in the U.S., impressive positioning that the firm has picked up thanks to a very important secret: Costco doesn't really make any money on the stuff it sells. That may seem like a strange strategy for a retailer, but it's worked wonders for Costco, helping to propel shares more than 17% this year.

Costco boasts 686 big-box store locations worldwide, with about 70% of stores in the U.S. The firm is the undisputed king of the wholesale club store model, selling memberships to consumers who want the privilege to get big volume discounts on items they buy. Because of that membership model, Costco doesn't really need to make profits selling merchandise. Instead, those high-margin membership revenues contribute the majority of the company's profits.

The membership model also creates very sticky customers among the 80 million or so consumers who held a Costco card at last count. That sunk annual cost means that customers are more likely to shop at Costco, and they're less likely to spend the membership fee at a competing wholesale store. Finally, Costco is a financial standout. The company currently carries $272 million in net cash on its balance sheet, a lack of leverage that gives the firm more options if the economy takes a turn for the worse.

Red Hat

Let's move from a retailer that doesn't want to make money on merchandise, over to a software company that wants to give its tools away for free. Red Hat (RHT - Get Report)  is an enterprise software company that's built a dominant position in the Linux server market by building open source operating systems and software tools. That out-of-the-box model has provided Red Hat with some strong performance over the last few years.

Instead of charging for software licenses, Red Hat's revenues come from training, maintenance and tech support fees that it charges businesses that use its platform. As enterprise customers focus on getting the most bang for their IT spending buck, that free solution has become a compelling sales case. While competition is fierce in the enterprise software space, Red Hat's advanced solutions have helped the firm command more than 60% of the Linux server market.

A big installed base means that Red Hat remains an important player in clients' server rooms, one of the few corners of the non-mobile software space that's been forecast to actually grow in the next few years. Increasing demand for server capacity -- and the software to wring more performance out of limited hardware -- should continue to provide Red Hat investors with a strong tailwind in 2016.

Shares do trade at a rich valuation, but buyers are clearly in control of Red Hat's momentum this winter.

Activision Blizzard

Last up on our list of Rocket Stocks is Activision Blizzard (ATVI - Get Report) .

Activision has been on fire in 2015, nearly doubling since the beginning of the year. And there's little reason to think that breakneck performance will come to an end with the close of the calendar year. Activision Blizzard is the largest video game publisher in the world, with titles such as Call of Duty, World of Warcraft and Diablo in its library of titles.

Those franchise games give Activision Blizzard a dependable, annuity-like stream of revenues. For instance, the firm is able to produce successful follow-on titles that gamers are already invested in, taking away the creative burden of developing entirely new concepts. Activision also has a unique cash cow in its online role-playing franchises, generating recurring monthly sales from subscriptions.

Those subscriptions have been declining in recent years, but Activision has unique expertise and infrastructure to release future role-playing titles in the quarters ahead. Because gamers have a massive sunk cost in building characters and attaining status, they’re a lot less likely to switch to a competing franchise and restart the process, and that makes Activision's model very attractive still.

The next-gen gaming consoles are starting to see wider adoption, a trend that's likely to accelerate over the holiday season. Historically that's been a very strong revenue-driver for game publishers such as Activision. So, with rising analyst sentiment in shares this week, we're betting on this $28 billion Rocket Stock.

By Jonas Elmerraji

Source:http://www.thestreet.com/story/13387838/1/5-rocket-stocks-to-buy-for-end-of-year-gains.html?kval=dontmiss