5 Rocket Stocks to Buy as Stocks Hit New Highs
The big S&P 500 index managed to hit new all-time highs last week, breaking intraday records in four of the last five trading sessions. Clearly, bulls are in charge of the market momentum right now.
That's a very good thing for anyone who owns stocks. From a statistical standpoint, new highs tend to beget more new highs. When everyone who owns stocks is sitting on gains, selling pressure tends to get tamped down and buying increases. In other words, 2016's ultimate highs are most likely still to come.
Still, that doesn't mean that this is a "dartboard market." In other words, this isn't the sort of overly exuberant market where you can make money just by tossing a dart at a dartboard covered with ticker symbols. In fact, despite the consistent new highs made by the S&P, nearly a third of S&P 500 components actually ended last week lower.
That's why it's crucial to have a strategy to separate the stocks that are working right now from the ones that aren't. To do that, we're turning to a fresh set of Rocket Stocks 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 358 weeks, our weekly list of five plays has outperformed the S&P 500's record run by 81.17%.
Without further ado, here's a look at this week's Rocket Stocks.
Alibaba Group
Up first this week is $200 billion Chinese e-commerce giant Alibaba Group (BABA) - Get Report . Alibaba's price performance doesn't look like anything to write home about at a glance - year-to-date, this big stock is basically trading at breakeven for 2016. But that stat masks a serious rally that's been taking place beneath the surface in shares of Alibaba more recently. This stock is up more than 34% since shares bottomed back in February, and Alibaba is trading at the high end of its 2016 recent range this summer.
Alibaba Group is an utterly massive e-commerce company - the biggest on the planet, in fact. The firm owns many of the most popular online marketplaces in China. Besides its namesake site, Alibaba's marketplaces include web marketplace Tmall, consumer-to-consumer sales site Taobao, and daily deals site Juhuasuan. Alibaba also operates the Alipay payment network, and a collection of smaller niche internet businesses. Alibaba has done an enviable job at diversification, both geographically and from a business standpoint; the push into hot areas like cloud computing should continue to move the needle on revenue growth.
Scale is massive at Alibaba. Currently around one in five Chinese consumers is an active shopper on one of the firm's websites, giving the firm's marketplaces some major advantages over the competition. Shoppers use Alibaba because of its vast selection of products, and merchants sell on Alibaba's sites because it's where the shoppers are - that virtuous circle isn't changing anytime soon.
United Parcel Service
United Parcel Service (UPS) - Get Report shareholders are enjoying a good run in 2016. Since the start of the year, this $100 billion shipping stock has rallied more than 15%, leaving the rest of the S&P 500 in its dust. UPS has been no stranger to our Rocket Stocks list so far this year (and for good reason) -- now it's making the list for another week this summer.
UPS' iconic brown trucks make up the world's largest private package delivery company, operating in a virtual duopoly with FedEx (FDX) - Get Report . UPS tips the scales as the larger of the pair, delivering more than 18 million items a day, on average. As more commerce moves online, UPS has been benefitting from higher volumes of parcels that need to gets to businesses and consumers.
It's incredibly costly and difficult to replicate UPS' huge infrastructure of more than 500 aircraft and 100,000 ground vehicles, a fact that dramatically reduces the risks of newcomers competing for shippers. Even though e-tail giant Amazon.com (AMZN) - Get Report has notable been investing in its own shipping infrastructure lately in some markets, losing the lowest-margin shipments that Amazon wants to take over would probably be a blessing in disguise for UPS.
Meanwhile, persistently low fuel commodity prices should continue to provide a long-term tailwind for UPS' profitability in 2016.
Nike
There are few brands as iconic as athletic apparel giant Nike (NKE) - Get Report -- the firm's "Swoosh" logo automatically hikes the price of any item it's printed on. And that marketing cachet should continue to be an important growth driver internationally in the years ahead.
Nike is the biggest footwear, apparel, and sports gear maker, selling its products through a network of more than 50,000 retail accounts, plus about 850 company-owned stores. Nike's own sales portals made up almost a quarter of total revenues last year, a selling mix that's helped to drive net margins that consistently sit in the double-digits. Emerging markets contributed another quarter of Nike's sales last year, providing an important growth funnel as a burgeoning middle class population in countries like India and China spend more money on low-cost status symbols like branded apparel.
Back home, Nike's growth pace has been slower. Despite the headwinds in the firm's core geographies, sales growth ex-U.S. has been at least partially masked by the strength of the U.S. dollar. The possibility for a dollar correction in the second half of 2016 would come with an extra shot in the arm for Nike's profitability.
With rising analyst sentiment in shares of Nike this week, we're betting on this sports apparel giant.
Southwest Airlines
Low-cost airline Southwest Airlines (LUV) - Get Report is benefitting from the rising tide of the U.S. airline industry. Lower fuel costs, higher passenger volumes, and rising fares are creating a perfect storm for airline profitability in 2016, even if most airline stocks haven't seen their share prices rise to meet the conditions. But as Southwest makes a move off of last month's lows, this stock could be about to make up for lost time in the second half of the year.
Southwest is the biggest airline in the country based on passenger volume, a distinction that shows Southwest's business model resonates with consumers. Southwest revolutionized the domestic airline industry in the early 1970s, by eschewing the conventional hub-and-spoke system that legacy operators had been using for years, and operating a single aircraft type for lower training and maintenance costs. In doing so, it's managed a record that's unheard of in the industry: 41 consecutive years of positive operating profits. Today, the firm's fleet of 700 aircraft fly to nearly 100 destinations, including a handful of popular vacation destinations abroad.
The introduction of new international routes could help to meaningfully boost margins. International flights tend to be legacy airlines' most profitable routes, and until recently Southwest hasn't meaningfully participated in that market. Likewise, the firm's outstanding timing on not hedging fuel should translate into much larger profits than most of its more risk-averse peers in 2016.
Herbalife
Last week was action-packed for nutrition stock Herbalife (HLF) - Get Report . Shares ended Friday up almost 10%, boosted by news that the company had settled its high-profile issues with the Federal Trade Commission. The news also puts the long-simmering dispute between billionaire Herbalife bear Bill Ackman and billionaire Herbalife bull Carl Icahn back in the spotlight.
Herbalife sells nutrition and weight management products through a direct sales network of more than 3.2 million individuals. The $7 billion firm is a multi-level marketer, a model that's been the primary driver of the scrutiny that Herbalife has been under in the last several years. While the FTC's statement that they're not calling Herbalife a "pyramid scheme", as alleged by Ackman, is good for investors, HLF's business will need to change materially in a way that's likely to reduce incentives for new distributor signups. Even so, Wall Street is clearly relieved that this stock's biggest black clouds are behind it.
As part of its settlement, Herbalife will pay $200 million in fines, a payout that works out to $2.15 per share. By contrast, the firm currently has nearly $775 million in cash stuffed in its balance sheet at the moment, a fact that makes the fine look a lot less painful. While Herbalife certainly hasn't made our Rocket Stocks list so far this year, the huge analyst sentiment shift following the FTC news is proving to be enough for this stock to make the cut for the first time this week.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.