BALTIMORE (Stockpickr) -- Stocks spent most of last week rolling over, with the big S&P 500 index correcting a healthy 0.68% as investors took gains from a market that hasn't been shy about hitting new highs. With the S&P sitting at the top of its recent range at the start of last week, a correction here isn't just normal -- it's expected.
We're likely to see that retracement continue into this week. Put simply, the broad market could give back approximately 4.5% from here without so much as threatening the primary uptrend in stocks that's been in force for the last 19 months.
So what's the best way to cope with a correction in the broad market? Buy the Rocket Stocks.
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 253 weeks, our weekly list of five plays has outperformed the S&P 500 by 77.5%.
Without further ado, here's a look at this week's Rocket Stocks.
So far, 2014 has been a pretty quiet year for stocks -- but that hasn't stopped Cisco Systems (CSCO) from turning out double-digit performance year-to-date/ Since the calendar flipped to January, Cisco is up more than 10%. And that relative strength looks primed to continue in shares of this $126 billion Rocket Stock.
Cisco is the world's largest supplier of the equipment and software used to connect devices. And now, with internet traffic still growing at a breakneck pace, demand for Cisco's mission-critical routers and switches remains strong for enterprise customers. Size is a big advantage in the network infrastructure space. Because Cisco's gear is designed to plug-and-play with other Cisco components, IT department ts that buy Cisco products can often see much lower integration and ongoing technical support costs. That gives Cisco an important economic moat right now, even if competition is trying to move in on its business.
Despite some missteps in its strategy over the last few years (CSCO shuttered its consumer-facing businesses in the wake of consistent losses), Cisco enjoys some impressive execution today. The firm boasts net profit margins approaching 20%, and a balance sheet that carries nearly $30 billion in net cash and investments. That's enough dry powder to pay for more than 20% of Cisco's outstanding shares at current prices, a big risk-reducer in this market today.
At the same time investors are bemoaning lofty valuations in other corners of the tech sector, Cisco sports a bargain price tag.
Legacy investment bank Goldman Sachs (GS) grabs the next spot on our Rocket Stocks list this week. Goldman needs little introduction -- its reputation as a well-connected financial powerhouse precedes it. After a series of incremental changes to its business over the last five years, Goldman is concentrating its focus on what it does best.
Goldman has caught attention lately over news that the firm has been selling off smaller side businesses (such as its NYSE designated market maker), the moves make sense. Operating a large number of disparate financial businesses lacks operational efficiency and drags margins lower. Focusing on lower-volume businesses means that GS returns more to investors for each dollar invested, and the upside benefits are only magnified in a rising market like the one we're in now.
Yes, the decision to structure Goldman as a bank holding company caused margin erosion by constraining the amount of risk that the firm is allowed to take. But the increased scrutiny isn't necessarily a bad thing -- it helps to prevent Goldman from conspicuously over-leveraging itself in chase of returns.
With most of Goldman Sachs' bruises wearing away, this stock is well-positioned to benefit from a buoyant equity transaction market in 2014.
For the last 18 years or so, Under Armour (UA) has been the 97-pound weakling in the athletic apparel business. But with shares up more than 31% on fundamental gains just in 2014, UA is starting to pummel its larger competition. UA has gone from making niche apparel for hardcore athletes to mainstream gear that can be found in more than 100 company-owned stores across the country and thousands of other brick-and-mortar retailers. And now, Under Armour looks well-positioned to keep up that outperformance for the rest of the year.
For years, the sports apparel market has been dominated by a small handful of brands (think one with a swoosh, and another with three stripes) -- and the hugely saturated market has been extremely challenging to break into. But Under Armour's premium performance-driven image has helped it secure a spot on store shelves.
As Under Armour battled the big name sportswear companies here at home, the firm really hasn't paid a whole lot of attention abroad. In total, overseas sales make up fewer than 10% of the firm's total revenue, but that lack of international exposure provides ample growth opportunities once UA starts to exhaust its top-line expansion stateside.
Make no mistake: This isn't a cheap stock right now. But with momentum in UA still looking hot, it makes sense to own this Rocket Stock right now.
Electronics retailer Best Buy (BBY) isn't a name that I expected to tack onto a Rocket Stocks list anytime soon. But the tides are turning at BBY in 2014, and while the firm is still far from out of the woods, it's making some big strides towards regaining its former grandeur. So with rising analyst sentiment in shares this week, we're betting on Best Buy.
Best Buy is the largest consumer electronics store chain in the country, with a whopping 16% of the market. Size doesn't necessarily imply profitability in big box retail, and so BBY has been working hard to fix that with a turnaround plan that aims to cut costs and give the firm a real advantage versus its online peers. In other words, Best Buy doesn't want to be Amazon.com's (AMZN) physical showroom anymore.
New offerings (like an improved Web site) have been designed to highlight Best Buy's biggest benefits: like the fact that consumers can walk out of the store same-day with their new electronics in-hand. And just as importantly, nearly $1 billion has been carved out of the firm's cost structure in a move to become more profitable in good times and bad ones.
BBY still has a lot of work to do before it becomes outright attractive to most investors again, but for now, big improvements and a dirt-cheap valuation make Best Buy a risk worth taking in June.
What's the best way to get your software used at big data centers? Give it away for free. That's the strategy that Red Hat (RHT) has used with great success for more than two decades now. Handing out software licenses isn't some kind of short-sighted growth gimmick. Instead, the firm makes money through training, maintenance and tech support fees that it charges businesses.
Because licensing costs are effectively zero and customization costs far less for a big enterprise IT department, Red Hat's value proposition versus a conventional server or workstation operating system is hard to argue with. Selling open source software does mean that competition is stiff, but Red Hat's expertise and software packages keep customers coming back. As a result, RHT owns more than 60% of the Linux server market.
Red Hat's big installed base, in turn, means that the switching costs are high for its customers. And even better, the model means that RHT operates with low capital needs, no debt and deep margins. At last count, the firm carried approximately $1.5 billion in net cash and investments, enough to cover around 15% of its market capitalization at today's prices. With rising analyst sentiment in shares of RHT, 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.