BALTIMORE (Stockpickr) -- International drama is driving the price action this morning, with a surprise trade deficit in China and the ongoing situation in the Ukraine weighing on equity prices this morning -- and more noticeably on oil prices.
Crude futures dropped more than 1% on fears over weaker demand this morning.
But U.S. stocks are still holding their ground, even as Asian equities sell off hard. To take advantage of the relative strength here at home, we're turning to a new set of five new "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 239 weeks, our weekly list of five plays has outperformed the S&P 500 by 82%.
Without further ado, here's a look at this week's Rocket Stocks.
First up is Walt Disney (DIS), the name behind a vast portfolio of TV, film and theme park assets spread across the world. The firm's intellectual property includes some of the most beloved characters in the world, from Mickey Mouse to Hannah Montana. Disney also owns some less obvious businesses, such as ESPN, that contribute a huge portion of the firm's revenue.
Disney's integrated entertainment model gives the firm some big advantages over smaller companies. Because Disney has its hand in everything from media networks and movie studios to theme parks to merchandise, DIS can leverage the same characters across all of its businesses for substantial profits. TV networks are a cash cow for Disney, and the firm's ESPN franchise is the most valuable cable network on the planet. The network, in turn, makes up the biggest chunk of Disney's TV profits.
For the last few years, the black sheep in Disney's business has been the theme parks. Because they're hugely capital intense and cyclical, Disney's parks were an earnings drag in the wake of the Great Recession -- but as economic headwinds die down, parks are contributing to Disney's profits once again. The economic moat at Disney is immense, and as the economic engine keeps spinning in 2014, shareholders stand to keep benefitting.
Auto parts retail giant AutoZone (AZO) is coming off the heels of some stellar performance in the last year; since March 2013, shares have rallied more than 40%. That shouldn't come as a huge surprise; AutoZone's 4,700 stores are well positioned to take advantage of an older national car fleet than ever before in the U.S., a fact that's driving the market for replacement parts. Those tailwinds aren't likely to die off anytime soon.
AutoZone isn't just taking advantage of older cars here at home -- the firm has been investing heavily in Latin America, with more than 320 stores in Mexico and a small presence in Brazil. That exposure to emerging markets should help to add some outsized growth rates to AZO's income statements, especially since the average fleet age in those countries is actually older than it is here in the U.S. A big collection of private label brands on AutoZone shelves should help to keep net margins above the 10% mark.
This firm's business isn't only in retail. AutoZone also operates more than 3,000 commercial parts centers inside its retail stores, supplying professional car repair businesses with parts and its proprietary ALLDATA auto repair software. Margins on the commercial side of the business don't match the profitability that AZO enjoys on the retail side, but volumes and software sales help make up for the shortfall.
With rising analyst sentiment in AZO this week, we're betting on shares of this Rocket Stock name.
One of the biggest stars at the Winter Games in Sochi wasn't an athlete. It was Under Armour (UA), the athletic apparel brand that's been snatching market share from competitors in record fashion. Sochi sponsorships were Under Armour's big opportunity to sell itself to the international community, and even some minor drama with the U.S. Men's Speedskating team resolved in UA's favor.
Now, with bigger international recognition, Under Armour is set to go global. Today less than 10% of sales are earned outside of the U.S., leaving a lot of opportunities on the table.
Under Armour has done a stellar job of establishing itself as a performance brand, a major factor that attracts consumers. That technical expertise has helped to steal share from market incumbents like Nike (NKE) in a space that's nothing if not competitive. The firm's extension in to new categories such as footwear about five years ago should continue to drive top-line growth and premium dollars from consumers who identify with Under Armour's performance positioning.
UA is a long way away from meaningful sales in emerging markets, where Nike and other large peers are looking for growth. But that's a good problem to have the firm has enough low hanging growth opportunities that the more hard-fought ones aren't going to happen for a while. Even though shares are far from cheap, UA's growth potential justifies the price tag.
After struggling to stay afloat in recent years, the world's second-biggest cruise company is taking advantage of big positive trends in consumer spending. Royal Caribbean Cruises (RCL) operates 41 cruise ships under the Royal Caribbean, Celebrity, Azamara Club Cruises, Pullmantur and CDF Croisieres de France lines. The firm also holds a 50% stake in Germany's TUI Cruises.
RCL operates in a duopoly with No. 1 player Carnival (CCL), with its core business here in the U.S. With an aging baby boomer demographic in the firm's crosshairs, there's a large and underpenetrated segment of the population that RCL should be able to convert to customers in the years ahead. Investments in the firm's fleet (including new feature-packed investments like the Quantum class ships) should help to attract and keep cruise newbies within the Royal Caribbean brand.
Cruise lines are unquestionably capital intense. Those same major ship investments that attract customers drives balance sheet leverage at RCL, which already has more leverage than Carnival. Still, levering up at the right time in the cycle is a huge growth driver, and that's what's happening at RCL. Look for ballooning cruise demand to spur upside in the near-term.
Last, but certainly not least, is Nvidia (NVDA). Nvidia is one of the largest makers of graphics cards, sharing the spotlight with chipmaker AMD (AMD). That leaves Nvidia as the sole pure-play left in the business. As PCs largely become commoditized, Nvidia remains one of a few component makers that's able to still earn deep margins for its efforts. That does put a big target on the firm's back, however, so management is differentiating its offerings outside of graphics chips.
NVDA has been putting R&D efforts into supercomputing, servers and mobile device chips, building a portfolio of attractive offerings that take some of the risks of the legacy business off of investors' shoulders. The timing is important, especially as processor makers ramp up the capabilities of integrated graphics chips. NVDA's new targets aren't just well-suited for a firm with graphics expertise -- they're also positioned for big growth in the years ahead as mobile device demand remains high and cloud computing needs drive sales for high-end enterprise chips.
From a financial standpoint, Nvidia is in stellar shape, with around $4.7 billion in cash that offsets a manageable $1.37 billion debt load. That net cash position is enough to cover approximately a third of NVDA's market capitalization at current prices, a fact that erases considerable risk from shares. With rising analyst sentiment pouring into Nvidia this week, we're betting on shares.
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.