Buy These 5 Big Stocks for Big Gains
Stocks are pressing up against all-time highs again this week, after the big S&P 500 index ended just a hair's breadth away from setting a new record price on Friday.
New highs are a big deal from an investor psychology standpoint. When the stock market averages are higher than ever before, it means that the majority of investors are sitting on gains regardless of their timing, reducing the drive to sell. It's important to point out that hanging out around new highs isn't a strange phenomenon; it's actually normal. Since 1982, almost half of S&P 500 trading days have closed within 5% of all-time highs.
In other words, new highs beget more new highs. And that makes now the time to start thinking about which individual stocks are likely to outperform as the broad market edges closer to its previous high water mark. To do that, 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 357 weeks, our weekly list of five plays has outperformed the S&P 500's record run by 81.16%.
Without further ado, here's a look at this week's Rocket Stocks.
Johnson & Johnson
We're starting off big, with $338 billion healthcare company Johnson & Johnson (JNJ) - Get Report . Johnson & Johnson is the prototypical blue-chip stock, but don't mistake its large size for sluggish upside potential. J&J has been in rally-mode all year long, up almost 20% since the calendar flipped to January. And it looks like there's more where that came from at Johnson & Johnson this summer.
Johnson & Johnson isn't just big -- it's the biggest company in the health care sector. The firm is also the most diversified, with exposure to everything from consumer brands, such as Band-Aid, Tylenol, Neutrogena and Acuvue, to medical devices and pharmaceuticals. That wide range of operations means that the firm is less impacted by regulatory changes that only impact the medical device business, for instance, or the huge competition brewing in branded drugs.
J&J's financials come with a clean bill of health too. The firm currently carries just over $16.5 billion in net cash and investments, enough to cover about 5% of the firm's market capitalization at current price levels. That big cash cushion gives Johnson & Johnson options when it comes to acquisitions as well as dividend payouts. Near-term, investors should be keeping an eye out for Johnson & Johnson's second quarter earnings call on July 19.
Cisco Systems
Cisco Systems (CSCO) - Get Report is another mega-cap stock that tips the scales as tops in its niche -- and another one that's managed to beat the rest of the broad market so far this year. Year-to-date, Cisco is up almost 8%, beating the S&P by a factor of two in 2016.
Cisco Systems is the biggest data networking equipment and software company in the world. If you walk into any enterprise-grade server room, you're pretty much guaranteed to see Cisco-branded gear somewhere in the room. And as demand for cloud services continues to charge higher, Cisco remains on the right side of an important trend. Like other tech firms, Cisco has been drawing an increasing share of its revenues from services, a shift that imparts high margins and more frequent repeat customers.
Ultimately, size matters quite a bit in Cisco's mainstay network appliance business. For instance, because Cisco's gear is designed to plug-and-play with other Cisco components, IT departments that "keep it in the family" can often see much lower integration and ongoing technical support costs. And a huge installed base means that Cisco's sales people already have contacts at just about every large enterprise customer on the planet, giving the company the opportunity to cross sell as new products hit the market.
Analyst sentiment is swinging higher in Cisco this week, so we're betting on shares.
Cisco is a holding in Jim Cramer's Action Alerts PLUS charitable portfolio. Cramer and Research Director Jack Mohr wrote on Friday:
We view the stock's 3.6% yield, which is not only safe but also likely to increase, as incredibly lucrative in light of the historically low-rate environment. CSCO is one of our positions with a large international exposure, and thus benefits from a softer dollar. Of course, this means CSCO feels the pain of a stronger dollar that may only get stronger as a result of the depreciating pound and euro. Still, we continue to like CSCO's evolving software business and appreciate the company's strong, stable dividend and shareholder-friendly buyback programs. We believe these should offer support in the coming days, but recognize that investors are focused on international exposure for now and trading could be irrational in the near term.
TJX
This isn't the first time TJX (TJX) - Get Report has made our Rocket Stocks list this summer -- and for good reason. TJX Cos. has been a serial outperformer in 2016, up 11% since the calendar flipped to January. As economic uncertainty continues to challenge investors, TJX's defensive positioning should keep pushing its share price higher.
TJX is one of the biggest off-price retailers in the world, selling bargain-priced brand-name merchandise through big-box store chains such as T.J. Maxx, Marshall's, Sierra Trading Post and HomeGoods. The firm operates approximately 3,600 stores worldwide, although the U.S. and Canada still contribute 86% of TJX's overall revenues. The TJX business model revolves around buying massive unsold inventory from the full-price retailers, helping them clear their warehouses, while giving consumer the chance to pick up desirable brands on the cheap. In the middle of that transaction, TJX collects a markup.
TJX has historically been a good steward of shareholder capital. Even though the company has a huge geographic footprint, those stores have primarily been built with equity and cash from operations, not debt. Today, the firm has more than $732 million in net cash on its balance sheet, enough dry powder to keep growing as well as to smooth out any financial hiccups that might arise.
Investors get their next peek at TJX's financial figures in mid-August, when the firm reports its second quarter earnings numbers.
eBay
Online marketplace eBay (EBAY) - Get Report has been off to a shaky start in its first year after spinning off payments subsidiary PayPal (PYPL) - Get Report . The e-commerce giant is down 10% year-to-date, but this stock could be due for an about-face this summer. Here's why.
eBay is one of the biggest online retailers in the world, facilitating an estimated 5% of all e-commerce transactions last year. Online marketplaces are another business where size makes all the difference, and eBay's 162 million active buyers and 800 million live listings create a virtuous cycle where buyers flock to eBay because of its huge number of listings, and sellers use the site because it's where the buyers are. That positive feedback loop does a good job of protecting eBay's brand.
More recently, management has been working to ramp up its effectiveness as a standalone company post-PayPal, improving its software for sellers as well as increasing engagement marketing. Those efforts should continue to pay off in 2016, as eBay continues to provide a unique marketplace presence while rivals remain distracted by conventional big box retailers.
Dr. Pepper Snapple Group
Last up on our list of Rocket Stocks is beverage company Dr. Pepper Snapple Group (DPS) . Dr. Pepper Snapple owns a collection of popular household name brands, including namesake Dr. Pepper and Snapple, as well as labels like 7UP, A&W, and Hawaiian Punch. The firm's scale may be vastly smaller than beverage giants Coca-Cola (KO) - Get Report and PepsiCo (PEP) - Get Report , but most of the firm's brands are either number one or two in their respective categories.
So while the cola wars rage on, DPS has been finding success owning a smaller niche.
Dr. Pepper Snapple is largely vertically integrated in many markets, manufacturing, bottling and even distributing its own products. The firm does rely on third-party bottling partners for approximately 40% of its volume, but the remaining 60% is completely handled in-house. Unlike Coke and Pepsi, the firm's product rights are limited to the North American market, where the U.S. is its biggest revenue generator by far. That focus on a single market simplifies the business, and requires lower levels of capital investments.
With rising analyst sentiment in DPS this week, we're betting on shares of this $18 billion beverage stock.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.