BALTIMORE (Stockpickr) -- It's earnings season, and the fundamental results continue to look overwhelmingly positive for U.S. stocks. Since the "official" start of earnings season on July 8, 76% of S&P 500 components that have reported so far have beaten Wall Street's earnings estimates. That's a pretty clear indication that analysts are underestimating stocks' earning power in general for the quarter.
But while earnings have been a big positive so far, price action hasn't followed suit. Since that July 8 kickoff, the S&P has only moved 0.03% higher, a pretty immaterial move. That's pretty indicative of the anxiety levels in the broad market right now. With the big indices pressing up against all-time highs, many investors are feeling the most cautious they've been since 2009.
That's why, this week, we're turning to a fresh set of "Rocket Stocks" worth buying this week; these are the names that are most apt for upside traction in July. (Check out last week's Rocket Stocks here.)
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 258 weeks, our weekly list of five plays has outperformed the S&P 500's record run by 78.88%.
Without further ado, here's a look at this week's Rocket Stocks.
First up is athletic apparel giant Nike (NKE), a name that doesn't need much in the way of an introduction. It does, however, need a shot in the arm in the way of performance: shares are effectively flat since the calendar flipped to 2014, dragging sideways for the last six months. But that could be about to change thanks to bullish analyst sentiment that's coming into shares this week. So, why buy Nike?
Nike is the largest designer and seller of athletic footwear and apparel. The firm's iconic swoosh logo can be found at a network of more than 50,000 retail chains, plus another 750 Nike-owned retail stores spread across the world. Nike also owns other brands well known brands, including Converse and Hurley. Nike still books around 40% of its sales in North America, but that sales mix should skew more overseas in the years ahead, as growing middle class populations spend more money on status symbols like Nike apparel.
The Nike brand enjoys a symbiotic relationship with retailers. Because of the brand's popularity and sales numbers (it's not uncommon for Nike products to generate close to half the sales at a footwear store), Nike enjoys pricing power that few other manufacturers can boast. So while competition remains stiff in the athletic apparel segment both at home and abroad, Nike's current positioning puts it a step ahead of the peers vying to steal market share.
Look for a test of $80 resistance at an important breakout signal in NKE this month.
2014 has been a good year so far for credit ratings agency Moody's (MCO); shares of the $20 billion financial data firm are up more than 15% since the beginning of the year. And thanks to rising debt issuance volumes globally, that trajectory is unlikely to change in the second half of the year.
Moody's has some big competitive advantages. As one of the "big three" credit ratings firms, Moody's controls approximately 40% of the market for debt ratings. Better still, ratings aren't exclusive -- firms require ratings from more than one agency to provide assurances to investors. That greatly reduces the competitive nature of the business. With interest rates sitting near zero right now, debt issuances are up as firms make the prudent choice of refinancing debt loads at higher rates. That gives Moody's a steady stream of business to keep up with this summer.
Beyond debt ratings, Moody's has expanded its reach into research and quantitative databases. Like MCO's bread-and-butter business, those areas are capital-light and sport deep net margins above 25%. In other words, it's very good business if you can get it. Management has de-leveraged Moody's own balance sheet in recent years, offsetting its debt load with an equal-sized cash position. That lack of balance sheet leverage greatly reduces the risks of owning this Rocket Stock in 2014.
TRW Automotive (TRW) is another name that's been a high flier in calendar year 2014. Shares of the auto supplier are up almost 40% since the start of January. TRW is one of the largest suppliers of safety systems and braking, steering and electronic systems for automakers. With facilities in 26 countries, there's a good chance TRW components are in your car, regardless of who makes it.
TRW's leadership in the complex safety space makes it hard for OEMs to turn to less entrenched safety systems providers; it's far easier to pay TRW's prices than it is to search for a cheaper supplier that's equally capable of manufacturing vetted safety equipment. And with a global automotive fleet that's older than it's ever been before, the replacement rate for aging cars should fuel considerable OEM component demand in the years ahead. That scenario is boosted even more thanks to extremely low interest rates that have been driving consumer vehicle purchases in the last several years.
Ultimately, the fundamentals at TRW are side factors for its share price right now. The primary driver of price is a pending acquisition talk with German auto supplier ZF Friedrichshafen AG. While ZF hasn't put a price tag on a TRW acquisition, rumors put a $12 billion valuation on TRW from its German suitor. A rival bid could push the price tag even higher. Shares could pop on the announcement of a pricing offer from ZF.
It feels alien to have electronics retailer Best Buy (BBY) on our Rocket Stocks list this week. After all, the store chain has had no shortage of detractors in recent years, and shares are down more than 31% since the end of last year. But analyst sentiment is coming back into shares of BBY this week, and shares' price trajectory has been looking very positive in the past six months. Since the stock's January drop, BBY is up 23%.
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. Those restructuring efforts have already saved nearly $1 billion annually, and should keep Best Buy from going the way of former top rival Circuit City.
Despite encroachment from the likes of Amazon.com (AMZN), Best Buy's biggest sales argument is the fact that shoppers can walk out of a Best Buy store with their merchandise in hand immediately. So even though shipping options have sped up incredibly quickly at online competitors, there's an exploitable market for BBY to focus on here.
With a cheap valuation and rising momentum, it looks like the tides are turning in Best Buy in 2014. While this is still a riskier name, it looks worth buying this summer.
Harman International Industries
Last up on our Rocket Stocks list this week is Harman International Industries (HAR), the Connecticut-based audio product maker behind well-known brands such as Harman/Kardon, Infinity, JBL and AKG. Harman's products are found in everything from high-end home and car audio systems to professional concert installations. As luxury spending continues to stay strong in 2013, that's panning out to strong performance for HAR’s income statement.
Harman's partners include a wide spectrum of carmakers. Names ranging from BMW and Mercedes-Benz to Kia and Hyundai can be equipped from the factory with HAR-manufactured sound systems, and that provides some important tailwinds for the firm in 2014. Just like the rising tide of auto sales is boosting numbers at TRW Automotive, Harman's big exposure to car stereos should provide some important growth this year.
The premium pricing of Harman's products also affords the firm the ability to earn reasonably high net profit margins in its business. As long as audiophiles continue to spend big bucks on listening gear (and help sell non-enthusiasts on high-end audio gear as well), that's unlikely to change.
From a financial standpoint, HAR is well-positioned, with a modest $300 million net cash position on its balance sheet. That lack of leverage means that HAR is well-positioned to handle any economic speed bumps on the horizon. With rising analyst sentiment in shares this week, we're betting on this Rocket Stock.
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.