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TheStreet Open House

5 Rocket Stocks to Buy in August

BALTIMORE (Stockpickr) - The combination of summer doldrums, Fed tapering, and muted earnings expectations can't seem to derail the rally in stocks. And it looks like investors are finally starting to get the hint...

The S&P 500 is more than 18% higher today than it was on Jan. 1. And as the upside from equities becomes more and more conspicuous, retail investors are starting to become buyers again. Don't mistake that for a contrarian signal -- fewer U.S. households owned stocks at the start of the year than in any time during the last two decades. That extreme was a contrarian signal to start buying; this modest uptick in investor participation is just confirmation of the rally.

So, with more upside left to wring out in 2013, we're taking a closer look at five new Rocket Stocks worth buying in August.

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 209 weeks, our weekly list of five plays has outperformed the S&P 500 by 80.66%.

Without further ado, here's a look at this week's Rocket Stocks.

Johnson & Johnson

Up first is healthcare giant Johnson & Johnson (JNJ): Johnson & Johnson's reputation precedes it -- the firm is the prototypical blue chip stock, with major consumer brands like Band-Aid, Tylenol, Neutrogena and Acuvue under its belt. But it's the firm's non-consumer pharmaceutical and medical device units that provide the lion's share of Johnson & Johnson's sales.

Johnson & Johnson offers investors an attractive combination of an industry focus in the healthcare field with the diversification of disparate business units -- since J&J's biggest unit, pharma, has the lingering threat of patent losses, sales from the consumer and medical device groups are very welcome. While the acquisition of orthopedic device firm Synthes ate up a big chunk of Johnson & Johnson's net cash, the firm's balance sheet is still pristine with around $6 billion in net cash on the books.

Johnson & Johnson's combined health care business enjoys some massive net profit margins -- and those translate into huge free cash generation. Besides lining the firm's coffers, big free cash flow capabilities provide ample ways for Johnson & Johnson to return value to shareholders. The firm's 2.87% dividend yield will continue to draw income investors -- and rising analyst sentiment is spurring our interest in shares of this Rocket Stock this week.

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