BALTIMORE (Stockpickr) -- So much for the "summer doldrums." Stocks are heating up alongside the temperatures in June.
Typically, summertime is the stretch that's most boring for stocks; with investors and traders on vacations, trading volume typically dries up and price action gets dull during the summer months.
But with a dearth of performance heading into June, fund managers are a lot more likely this year to postpone their trips to the Hamptons if it means tacking a few extra points onto their track records year-to-date. In the last two weeks and change, the S&P 500 is up more than 4% -- and the momentum-heavy Nasdaq Composite is up more than 6% over the same stretch.
So as trading gets interesting again this summer, we're making the most of it with a new set of Rocket Stock names 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 252 weeks, our weekly list of five plays has outperformed the S&P 500 by 77.88%.
Without further ado, here's a look at this week's Rocket Stocks.
Despite pretty tepid performance for the big indices so far this year, auto parts retailer AutoZone (AZO) is managing to provide investors with some impressive performance. Shares of the $17 billion parts stock are up more than 13% since the calendar flipped to January, more than doubling the S&P 500's performance over that same stretch. And as the summer approaches, AZO looks well position to extend that rally.
AutoZone is the largest car parts seller in the world, with more than 4,700 stores spread across the U.S. and Mexico and a much smaller presence in Brazil. In 2014, the firm has some stiff tailwinds pushing at its back -- such as the fact that the average car age in the U.S. is older than ever before, a major driver of replacement part sales. Exposure to Latin America holds some big growth potential for AutoZone. With much older national fleet ages in emerging markets, drivers looking to extend the lifespans of their vehicles are turning to AZO for parts.
The firm's big exposure to private label brands means that AutoZone is able to collect thick margins for its trouble. Last quarter, net profit margins weighed in at 12%. his 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. While the margins are a little thinner in wholesale, the volumes make up for that.
With rising analyst expectations in AZO this week, we're betting on shares of this Rocket Stock.
Software giant Microsoft (MSFT) is the next name on our Rocket Stocks list this week. MSFT needs little introduction -- the firm owns a broad collection of technology businesses, ranging from Windows and the Office suite of productivity applications to smartphones and Xbox gaming consoles. With a new captain at the helm of the ship in Satya Nadella, investors are seeing renewed excitement about MSFT's prospects going forward.
Microsoft is the poster boy for diversification in tech names. The firm hasn't historically shied away from major acquisitions -- even costly ones. And it's aggressively developed new technology in-house. As a result, it now owns a handful of very disparate assets as management tries to figure out MSFT's next big thing. Because Windows and Office still make up the lion's share of the firm's profits, Microsoft effectively has a subsidy as it explores other avenues.
Luckily for investors, Microsoft also has the cash to do that. The firm currently carries more than $80 billion in net cash and investments, enough to pay for approximately 23.5% of its current market capitalization. And MSFT is no stranger to returning cash to shareholders, with a 2.7% dividend yield and a long track record of buybacks and debt extinguishment. With an ex-cash P/E ratio of 11.7 as I write, this tech titan looks downright cheap right now.
Electronic Arts (EA) is having a spectacular run in 2014. Since the start of the year, this video game stock has rallied more than 51%, making it one of the top performers on the Nasdaq. And there's reason to believe that EA has even further to run.
EA is one of the biggest video game publishers in the world, with a portfolio of popular franchises that ranges from Madden NFL to Need for Speed to Battlefield. Sports is one segment that EA leads in, collecting approximately half of all sports game revenues with its third-party branded products. EA's franchise model lends itself to quick development lifecycles for games sold to an existing fanbase. As long as the firm keeps growing its portfolio of viable franchises, it should be able to sustain impressive growth rates.
While there's a lot of attention on mobile gaming right now, the next generation Xbox One and PlayStation 4 stands to be a big revenue driver for EA. Historically, new generations of console launches are major revenue drivers for game publishers, as content-hungry consumers spend more to get the most out of their pricey gaming investments. That should be a key driver of revenues for this Rocket Stock in 2014 and 2015.
The airline industry has been one of the best-performing corners of the market in the last year or so, and Southwest Airlines (LUV) has been one of the best examples of that upside potential. Southwest is the leader in the discount airline segment, offering consumers direct flights with a point-to-point network that reaches nearly 100 destinations.
Crisis breeds opportunity -- and that's exactly how Southwest has been able to secure attractive routes and airport leases in the last half-dozen years. While its less profitable rivals were struggling and consolidating in the wake of the Great Recession, LUV was expanding. Today, expansion overseas with routes to Hawaii, Cancun, and Cabo provides a big boost to revenues; international and long-haul routes are among the most profitable and supply constrained, and they should help boost LUV's margins in a meaningful way.
Operationally, LUV is a top performer in the airline space. The firm's decision to stick with a single aircraft type, the Boeing 737 (until the acquisition of AirTran added the 717 to the mix, now being leased to legacy rival Delta (DAL)), is a major cost saver. Southwest has 41 consecutive years of profitability, a record that's unheard of in this industry -- and we're betting on shares of this Rocket Stock this week.
Last but not least is semiconductor stock Broadcom (BRCM). Even if the Broadcom name isn't familiar to you, there's a good chance you've used the firm's products before. Broadcom's chips can be found in a bevy of popular consumer electronics, including the iPhone.
Broadcom's expertise is helping devices communicate. Its chips provide networking connectivity such as Bluetooth, GPS, and WiFi on a single chip, and BRCM was one of the first commercial names to perfect all-in-one communications solutions for OEMs. As electronics makers continue to jam more features into a small footprint, Broadcom's expertise is hugely valuable.
One of the most attractive (and unique) attributes about Broadcoms model is the fact that the company doesnt own its own production facilities. Instead, it outsources those tasks to third parties. While that means that BRCM cedes some profitability to its manufacturing contractors, the fact that BRCM doesnt carry chip factories on its balance sheet (and their associated overhead on its income statement) means that the firm cuts a leaner profile when times get tough.
Shares have gotten some upward pressure lately following news that BRCM is investigating strategic alternatives (i.e. a sale or spin-off) to unlock value for shareholders. That could present some interesting opportunities for investors this summer.
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.