BALTIMORE (Stockpickr) -- We're kicking off an important week for stocks this morning, even if it doesn't feel like it.
The S&P 500 has spent the last four trading sessions moving sideways, but it's been consolidating just 1 percentage point shy of all-time highs. On Friday, the big index hit the highest trading volume it's seen in almost a year before reversing to close 0.29% lower on the day. All of that is a pretty clear indication that there's a big battle going on between buyers and sellers right now.
If buyers can wrestle control, it could spark a big rally in the S&P. Otherwise, if sellers take command of stocks, it'll mean a correction. Either way it resolves, we're positioning ourselves for the best upside by taking a look at five new "Rocket Stock" names 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 241 weeks, our weekly list of five plays has outperformed the S&P 500 by 81.23%.
Without further ado, here's a look at this week's Rocket Stocks.
PepsiCo (PEP) may be best known for its soda products, but they're only half the story. That's because 50% of this Rocket Stock's revenues come from food brands like Doritos, Lay's, and Quaker. That bifurcated business has been attracting the attention of investors this year, as prominent shareholders pitch the idea of splitting PepsiCo into two separate companies. PEP makes the case that shareholders are best-served by keeping Pepsi as a single company, and their case makes a lot of sense.
As the biggest snack food maker in the world, and the No. 2 non-alcoholic beverage company, Pepsi's huge scale comes in handy at keeping distribution costs low. Today, North America still provides around 40% of sales, an outsized stat that leaves a lot of clear runway for growth abroad. That sort of growth opportunity is rare for a $125 billion company, and it warrants a premium from investors.
PepsiCo has historically also generated impressive growth through acquisitions. By buying snack food brands that are enjoying strong sales, PEP can augment its offerings in a way that a pure-play beverage stock can't. And don't forget about the dividend -- currently, PEP pays out a 2.76% dividend yield.
Delta Air Lines
A decade ago, if you'd told a room full of portfolio managers that airlines would be the hottest industry on the market during the age of triple-digit crude oil prices, you would have been laughed off stage. But sure enough, that's exactly what's been playing out in the past year. And legacy carrier Delta Air Lines (DAL) has been one of the best-positioned names to take advantage of the trend.
Delta is one of the country's biggest airlines, with more than 720 aircraft serving 247 mainline destinations globally. Delta's scale changed dramatically when it merged with Northwest Airlines in 2008, a move that's finally creating some big cost savings (and margin expansion) for the firm. As a legacy carrier, Delta's model is centered around spoke-and-hub flying -- but it also includes some of the industry's most profitable international routes, and a very popular frequent flyer program. Both of those factors mitigate the inconvenience of domestic layovers among the most profitable passengers.
Not that Delta has been opposed to different approaches, though; the firm has a 49% investment stake in Virgin Atlantic, for instance. Likewise, marketing efforts, like Delta's long-standing partnership with American Express (AXP), gives it access to a one of the largest issuers of corporate charge cards -- and incentivizes those business flyers to buy Delta tickets. The result is one of the highest operating margins in the airline business -- and Rocket Stock status this week.
Keurig Green Mountain
Earlier this month, one of 2014's biggest momentum stocks got a new name. On March 10, Green Mountain Coffee Roasters announced that it was changing its name to Keurig Green Mountain (GMCR), a move that puts the firm's hugely successful Keurig brand front-and-center going forward. Keurig is the GMCR's brand of beverage brewers that use self-contained K-Cups to make coffee, teas and other drinks. That "other drinks" catch-all is where the emphasis is going this year; a major deal with (and huge investment from) Coca-Cola (KO) will bring in-home soda making to consumers through the Keurig Cold brand.
That's helped squeeze shares more than 48% higher since the calendar flipped to January. Already, Keurig's K-Cups offer a sticky revenue stream for GMCR. Because they're proprietary, the firm can command premium pricing for them. And because the firm can offer new, diverse drink choices (such as hot cocoa or iced coffee), it's able to drive sales among its large installed base.
One of the most staggering stats about GMCR right now is the fact that the firm isn't particularly expensive despite its huge momentum. Shares trade for 33 times earnings, a reasonable multiple for a big growth name. Likewise, the firm sports a solid balance sheet with more than $100 million in net cash; this past year marks the first time GMCR has sported more cash than debt. With rising analyst expectations in GMCR, we're betting on shares.
There was one company that applauded Janet Yellen's hints at rising interest rates last week: Paychex (PAYX). Paychex is an outsourced HR firm that provides 570,000 small and medium-sized businesses with payroll and more specialized HR services. Because of the bevy of tax and compliance issues involved in a small business paying its people, the firm is able to earn profits for its expertise. So why does that make PAYX a winner in a rising rate environment?
Historically, Paychex has earned substantial income from float interest -- the interest money it earns on massive payroll accounts in between the time that employers deposit funds and employees cash their checks. But with rates held near zero for the past five years, PAYX has had to build revenues through other ancillary HR services such as 401k management and worker's comp insurance. Rates on the rise means that Paychex will be able to effortlessly boost its profits.
From a financial standpoint, Paychex is in excellent shape. The firm carries more than $838 million in cash and investments on its balance sheet, with no debt. That provides a lot of dry powder for its 3.27% dividend yield, and it covers around 5% of the firm's outstanding shares at current price levels.
Stanley Black & Decker
Stanley Black & Decker (SWK) hasn't been much of a performer in the last year -- shares are basically flat over a period when the S&P 500 was rallying double digits. But that sluggish stock performance could be due for a turnaround thanks to big industry tailwinds and newfound Rocket Stock status.
SWK manufactures construction and industrial tools, as well as security products and services. The 2010 combination of Stanley and Black & Decker brought together some of the most popular tool and equipment brands in the world, including DeWalt, Porter Cable, and Bostitch, and 18 other marques in addition to the firm's namesakes. Newer additions to SWK's lineup, such as industrial fasteners, offer important diversification away from the cyclical constriction and do-it-yourself business, where the firm has traditionally made its money.
Tailwinds in the North American construction segment are providing exciting growth opportunities for SWK once again, but it's emerging markets where the firm really has the most potential. Because 85% of sales come from developed countries, emerging markets are under-tapped, especially in industrial and infrastructure products that aren't as subject to consumer dollars as pricey power tools.
Earnings on April 21 could be the next big catalyst in SWK. Stay tuned.
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.