These 5 Rocket Stocks Are Ready for Blastoff

These stocks have both short-term gain catalysts and longer-term growth potential.
By Jonas Elmerraji ,

What a difference a month makes.

Just four short weeks ago, the big stock market averages were sitting at the bottom of a rough correction, and it looked like stocks were going to end the year meaningfully in the red for the first time since 2008. But October brought about a major rebound in stocks, with the big S&P 500 rallying 8.2% by the time the books got closed on Friday.

As I write, the major market indices are all back above breakeven on a total returns basis, and the S&P is a mere 2.5% below all-time highs once again. Even though there's still considerable investor anxiety in stocks right now, there's no question that we're heading into the final two months of 2015 in good form.

To take full advantage of that market shift, we're turning to a fresh set of five Rocket Stocks that look ready for blastoff 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 322 weeks, our weekly list of five plays has outperformed the S&P 500's record run by 78.05%.

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

Apple

AAPL data by YCharts

Apple's (AAPL) - Get Report  relatively muted response to record earnings numbers -- and guidance for another record-setting holiday quarter -- create an opportunity in shares of this tech giant. Apple is the undisputed king of mobile device and PC profits. The firm's iPhone and Macintosh products collect the vast majority of the industry's profits, a distinction that Apple has been able to pull off despite fierce competition.

One reason for Apple's dominance is its ecosystem. Because Apple provides both the hardware and software for the products it sells, it's able to wring better performance out of phone hardware and keep costs lower. Likewise, the Apple ecosystem means that consumers are less likely to jump ship to competing platforms -- high levels of interoperability between devices and sunk costs in app purchases help to encourage loyalty. That's representative in the stats from this past quarter: The company announced that around 30% of iPhone sales in the fiscal fourth quarter were to customers switching from an Android-based smartphone.

As more mobile carriers move away from the traditional two-year contract/subsidy model for phones, the net effect should be an even shorter upgrade cycle for consumers. Elsewhere in the ecosystem, the introduction of services such as Apple Music and Apple Pay are doing a good job of making the firm's offerings more integral to daily life -- and harder to switch from.

From a financial standpoint, Apple is still in excellent shape. The firm's latest filing puts its net cash position at around $141 billion -- enough to cover about 21% of Apple's market capitalization at current price levels. Even accounting for the cost to repatriate cash held overseas, that's a huge cushion for investors. Ex-cash, Apple trades for about 10 times earnings, a cheap valuation considering the frothy multiples that other tech stocks trade for right now. Expect the firm to generate substantial value in the typically lucrative fiscal first quarter.

Microsoft

MSFT data by YCharts

Another big tech firm that's making our Rocket Stocks list this week is Microsoft (MSFT) - Get Report . Microsoft is executing well, as evidenced by strong earnings at the end of October. Microsoft's double-digit earnings reaction was enough to make this $420 billion tech firm responsible for about 4.8% of October's rally in the S&P. And there's reason to expect more of the same in the final stretch of the year.

Microsoft offers a wide spectrum of software, hardware, and services, but it's the firm's software business that remains the dominant contributor to sales. The firm's Windows operating system and Office productivity suite still make up the lion's share of Microsoft's profits today, and management's decision to pivot its focus away from side-businesses and back to maximizing profitability from software licenses is paying off. The decision to put resources behind "the cloud" and mobile users should help keep Microsoft's incumbent position in Office, especially on the consumer side. Commercially, Microsoft still generates huge licensing revenue selling to enterprise IT departments, which adds up to nearly half of total sales today.

It shouldn't come as a surprise that Microsoft is in excellent financial health too. The firm held approximately $72 billion in net cash and investments, which pays for about 10% of Microsoft's market value at current levels. While not quite the discount we're seeing in Apple, it's a discount nonetheless -- and Microsoft's momentum looks strong as we head into the final stretch of 2015.

Alibaba Group

BABA data by YCharts

2015 has proven to be a challenging year for shares of Chinese e-commerce giant Alibaba Group (BABA) - Get Report . This $210 billion stock has stumbled more than 19% so far this year, harangued by growth concerns in China and stiff competition in the People's Republic. Still, Alibaba shareholders may end up with the last laugh this year. It looks like this big stock is finally able to catch a bid again this fall, and shares have rebounded hard in October, up more than 42% in the last month alone.

Alibaba is the world's biggest e-commerce company. The firm owns the most popular online marketplaces in China, and while its customers are global, its home market still makes up the vast majority of sales. Besides its namesake site, the firm's marketplaces include Web marketplace Tmall, consumer-to-consumer sales site Taobao and daily deals site Juhuasuan. Alibaba also operates the Alipay payment network as well as a collection of smaller niche internet businesses. About one in five Chinese consumers is currently an active shopper on one of Alibaba's sites, and as younger shoppers make up a bigger share of the country's spending, online marketplaces stand to benefit from that shift to e-commerce.

Alibaba posted better-than-expected earnings numbers on Tuesday, moving about 4% higher during the session. That positive earnings surprise caps off a significant rebound month for shares of Alibaba, and it should keep the firm's momentum alive into November. With rising analyst sentiment in shares of Alibaba this week, we're betting on shares.

Boeing

BA data by YCharts

Boeing (BA) - Get Report  has seen a pretty strong performance so far in 2015: factoring in dividends, this $99 billion aerospace stock has managed to rally more than 16% since the calendar flipped to January. Compare that with the barely breakeven performance in the S&P 500, and Boeing's price action is enough of a standout to warrant any number of flying puns. But there's reason to believe that Boeing's best days are ahead of it.

Boeing has made a big shift in the last few years, transitioning from a company that generated about half of its sales in the defense sector to one that sees around 70% of sales come from commercial aircraft. That entrenchment in the airliner business coincides with an environment that's great for selling airplanes; record airline profits plus record low interest rates are giving air carriers a valuable hedge against the inevitable rise of jet fuel prices. With Boeing's next-gen jets operating at substantial cost savings per passenger mile vs. the current global fleet, upgrading aircraft makes considerable economic sense.

So even with oil prices skimming multi-year lows, the fact remains that jet fuel is still the biggest variable cost on airlines' income statements. The desire to keep industry profits high should drive sales of planes like the 787 Dreamliner and the 737NG. And a nearly $500 billion backlog means that Boeing has no shortage of orders to fill over the next several years.

Illinois Tool Works

ITW data by YCharts

Even if you haven't heard of Illinois Tool Works (ITW) - Get Report , there's a very good chance you've come in contact with some of the products made by this $33 billion manufacturer. ITW's stable of brands includes Sub-Zero and Wolf appliances, Rain-X and ZipPak. In total, ITW owns more than 100 individual businesses that make everything from car seat heaters to industrial chemicals.

And while that might seem like an unmanageably-large list of subsidiaries, it's actually down from nearly 800 business units just a few years ago.

The key to ITW's success is decentralization. Historically, the firm has given its individual managers enough rope to hang themselves with, a strategy that's fostered entrepreneurialism and helped the firm grow. More recently, ITW has been backpedaling a bit on that autonomy, looking to help improve costs by re-centralizing some key administrative functions. That means individual managers will still have autonomy over their units, but they won't bear the financial burden of duplicated HR and accounting roles.

ITW is an industrial stock, and that makes its businesses cyclical. That's not a bad thing necessarily. Profits keep trending higher year-over-year at ITW with a few exceptions, and the firm is enjoying the fat side of the economic cycle right now. Strategic selling of operating businesses has left the firm with a much slimmer profile and a collection of the most attractive remaining businesses, and that's been a very good thing for shareholder returns over the long term.

With rising analyst sentiment coming back into shares this week, ITW makes our Rocket Stocks cut.

Disclosure: This article is commentary by an independent contributor. At the time of publication, the author was long Apple.

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