BALTIMORE (Stockpickr) -- Monday's market closure in observance of Martin Luther King, Jr. Day is providing an extended reprieve for traders to catch their breath after what's been a pretty lackluster follow-up performance to a breakneck stock performance in 2013.
But even though the S&P 500 is in corrective mode right now, it's premature to think that anything's changed in the big picture.
Earnings season continues to be a key driver of stock prices this month, as investors get one of the four fundamental updates of the year on most of their portfolio names. Earnings are likely to continue to be the single most important news item for the next month and change. By and large, earnings haven't been horrible this quarter, and that's saying something if they can support the 29.6% valuation bump that the broad market tacked on in the past year.
Yes, there's still quite a bit of upside potential in this market. To make the most of it, we're turning to a fresh set of Rocket Stocks for 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 232 weeks, our weekly list of five plays has outperformed the S&P 500 by 86.33%.
Without further ado, here's a look at this week's Rocket Stocks.
Aerospace giant Boeing (BA) hasn't just been able to keep up with the market's impressive rally in the past year -- it's stomped it. In those trailing 12 months, BA has given shareholders gains of more than 87% thanks primarily to the conspicuous successes of the firm's commercial airliner businesses. While launch problems were certainly part of the program, it's hard to argue with the fact that the long-awaited 787 platform still looks like a potential game changer.
Boeing manufactures aircraft and aerospace components for the commercial air travel and defense sectors. The firm's sales are split nearly evenly between the commercial and defense units, with a whopping $415 billion backlog (more than four years' worth) at last count. Boeing has a lot on the line with the 787, but so far, the hiccups have been relatively muted, and Boeing is having little trouble selling its airline customers on the vastly improved fuel efficiency of the model.
Make no mistake: Fuel efficiency sells planes. Cutting the single-biggest cost in the airline business is what gets airlines to replace their fleets with new models. By that same token, less-conspicuous offerings, such as the introduction of a next generation 737 with new, more-efficient engines, should be huge sales drivers in the year ahead as airlines continue to focus on cutting their biggest cost: fuel.
Financially, Boeing is in exemplary shape. The firm has $7.4 billion in net cash and investments on its balance sheet, a number that's not valuation-jarring for BA but is truly meaningful considering the mammoth costs involved in taking a new airframe to market. Earnings on Jan. 29 could provide a big catalyst for BA next week, but we're betting on this Rocket Stock ahead of that date.
From an aircraft manufacturer to an airline. Southwest Airlines (LUV) has been another high flier in the last year, rallying more than 88% since this time last year. Frankly, the age-old advice against investing in airlines is garbage. Like any cyclical industry, every ebb in airline stocks gets followed up by a flow. And that's the part of the cycle we're in now.
Southwest is the largest air carrier in the U.S. based on passenger count. The firm's 700 (all Boeing) aircraft count includes the hulls acquired when the firm bought AirTran in 2011. Southwest's point-to-point network to nearly 100 destinations eschews the hub and spoke approach seen at legacy carriers. As a result, consumers looking for direct flights at non-hub locations get considerable convenience by booking with LUV. The firm was also the first to roll out a limited models across its entire fleet, dramatically reducing maintenance costs and keeping customer experience uniform.
Historically, Southwest has been one of the most adept airlines when it comes to hedging fuel costs. While most of the firm's most lucrative hedges have expired, Southwest has been able to maintain enviable net margins -- more than 5.7% in the most recent quarter.
So while most investors sidestep Southwest because it's an airline stock, we're betting on shares this week.
Helmerich & Payne
Oil and gas driller Helmerich & Payne (HP) is the firm that gets called in when energy companies want to pull commodities out of the ground. The oilfield service business has been buoyed by historically high oil prices for the last few years, and increased yields from innovative drilling techniques have helped servicers like HP pull deeper margins out of their efforts.
As a contract driller, one of HP's biggest assets is its FlexRig platform of mobile land rigs the FlexRigs provide better platforms for unconventional and horizontal drilling, and as a result, the firm is able to command a material premium on its day-rate for drilling jobs. That considerable demand from oil firms is a significant asset for HP, especially as rival drillers dump cash back into their businesses to upgrade drill rigs to compete.
Financially, HP is in strong shape. The firm sports a net cash and investment balance of $569 million, again not a valuation coup, but a big plus given the capital-intense nature of the contract drilling business. With a big replacement cost on Helmerich & Payne's fleet, the firm looks cheap at its current earnings multiple of 12.8.
Herbalife (HLF), on the other hand, isn't exactly cheap. This stock has ballooned in price by more than 61% in the last year, ratcheting its valuation higher in kind (Full disclosure: Separately, I own this name for technical reasons.) But that's not stopping Herbalife from making our Rocket Stocks list today -- even after some big selling to end last week.
Herbalife sells nutrition and weight management products through a direct sales network of more than 1.9 million individuals. That same sales network has put a lot of scrutiny on shares. Words like "pyramid scheme" have been thrown around publicly, and shares have seen some volatile price action as a result. Indeed, HLF is a multilevel marketing company, warts and all. But Herbalife has also managed to come out clean from every investigation into its practices, and that, coupled with a quarter of the stocks' float currently short, makes HLF upside look interesting now.
Last week's downside was spurred by speculation that a Chinese investigation into another multilevel marketing company could create trouble for Herbalife, but the connection is (for now) a little too tenuous to warrant the drop we got to trendline support.
With rising analyst sentiment, shares are meeting our Rocket Stock criteria for the first time I can remember. For more risk-hungry investors, HLF could have an interesting week.
Last, but certainly not least, is Lennar (LEN), a $7.3 billion homebuilder that's rounding out our list of Rocket Stocks this week
Lennar is a vertically integrated homebuilder, providing everything from construction to mortgage services, title insurance and closing for homebuyers. The firm's subsidiaries also own positions in commercial real estate and multifamily complexes. That collection of businesses effectively makes Lennar a leveraged bet on the real estate market -- not a bad bet to make in recent years. Rewind a few years earlier and that certainly wasn't the case, but the firm took the hit in 2008 and 2009, getting rid of properties on its balance sheet at small profits or at losses just in order to build its cash reserves back up.
Today, Lennar's focus on the lower end of the housing spectrum is starting to look particularly well positioned again. The firm has been buying land aggressively again, and that abundant land ownership on its balance sheet should provide some big opportunities in the years ahead -- especially because much of it is recorded on LEN's balance sheet at less than fair value.
Earnings in March could be a big catalyst to watch in Lennar. Meanwhile, we're betting on shares this week.
To see all of this week's Rocket Stocks in action, check out the Rocket Stocks portfolio at Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.