BALTIMORE (Stockpickr) -- We're only four days in, but already, September is off to a strong start. The S&P 500 index closed at a new all-time record high on Friday, edging the big index's year-to-date gains a little closer to the double-digit mark. As of Friday's close, the S&P is up 8.6%.
And while that's a strong showing, 2014 certainly hasn't been a "dartboard market." In other words, picking stocks at random (by, say, throwing darts at a board of ticker symbols) isn't likely to net you similar returns. As I write, around a third of the S&P is actually down this year.
So yes, stock picking still matters a whole lot in 2014. That's why we're turning to a new set of "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 264 weeks, our weekly list of five plays has outperformed the S&P 500's record run by 79.82%.
Without further ado, here's a look at this week's Rocket Stocks.
Southwest Airlines (LUV) is in momentum mode. Shares of the $22 billion low-cost airline stock have rallied almost 75% since the calendar flipped to January. Historically, Southwest has attained levels of profitability that peers simply couldn't compete with, and now, with airlines industry-wide performing well again, Southwest is managing to fare even better.
Southwest effectively created the bargain airline segment, carving out a niche with its point-to-point flight network that minimized layovers and keeping costs low with a single-type fleet of Boeing (BA) 737s. Now, fuel cost savings in the new 737-800 model should help to provide material margin improvements over the long-term as they become more prevalent in the fleet.
That fleet upgrade should come with another beneficial side-effect for LUV: longer, more lucrative routes. To date, the firm's exposure to international and long-haul domestic flights have been limited, but that's changing with routes to vacation destinations such as Cabo, Cancun and Hawaii. Ultimately, the airline industry gravy train won't last forever, but LUV is generally better-positioned than its peers, and there's still plenty of time to take advantage of this stock's cyclical swing.
2014 has also been a strong showing for shares of NXP Semiconductors (NXPI) , a Dutch semiconductor stock that got spun out from Philips back in 2006. Year-to-date, NXPI has rallied more than 54%, beating the broad market by a very big margin. And NXPI looks ready to extend that performance into the second half of the year.
NXP Semiconductors develops and manufactures chips used in everything from cars to credit cards. The firm co-created the near field communications chipsets that are becoming increasingly popular in mobile devices today, potentially driving big growth as payment companies look for NFC options as a possible next-generation solution to the credit card. From a sales standpoint, the firm's real bread and butter comes from processors and microcontrollers for mobile devices.
Financially speaking, NXP is in good shape, with more than $700 million in cash and investments offsetting a reasonable $3.6 billion debt load. Profitability (measured by net margins) has hovered in the low-to-mid double digits for the last several quarters, an indication that NXPI is kicking off its sector upswing after a challenging couple of years for semiconductor names. With rising analyst sentiment in shares, we're betting on NXPI this week.
Data storage and management firm NetApp (NTAP) is enjoying a swift industry tailwind in 2014. The firm is a leader in network-attached storage, devices that can plug into customers' existing networks on an ad-hoc basis, keeping storage costs low versus larger-scale system revamps. As the sheer volume of data collected by companies continues to grow, NetApp should be a primary beneficiary.
Besides the need for more efficiently managed storage in general, the growth of private clouds is an important driver for NetApp right now. Because the firm is one of just a couple that offers turnkey solutions for firms wanting to build their own cloud tools for internal use, it's able to collect fat margins for its trouble. Early-to-market status means that NetApp today has a huge installed base of customers who have big cost advantages by keeping storage appliances from a single manufacturer.
From a financial standpoint, NetApp is in stellar shape. The firm currently carries more than $5.5 billion in net cash and investments on its balance sheet, enough dry powder to pay for more than 40% of its market capitalization at current levels. That's a huge level of risk reduction for investors in NTAP right now, and it's one that puts the firm's ex-cash P/E multiple at a gaunt 13.5. NTAP is a cheap name in a sea of pricey equities.
Under Armour (UA) , on the other hand, is a lot less cheap. In fact, UA is downright expensive right now – with shares squarely in growth mode, investors are paying for the privilege of owning shares. But with momentum putting Under Armour's trajectory up and to the right on its stock chart, this sports apparel name looks like it still has higher to run.
Under Armour is one of the fastest-growing sports apparel names on the market today. While the market for athletic gear is largely saturated by more established rivals like Nike (NKE) , UA has been stealing market share thanks to innovative products and a more performance-driven image. Put simply, UA has managed to do the impossible in the last several years from a market share standpoint, so it's no surprise that investors are anticipating more of the same.
International markets hold a whole lot of upside potential for Under Armour right now. Today, the firm only earns around 8% of sales outside the U.S., a number that should continue to climb as its brand recognition improves thanks to sponsorships and merchandising at ex-U.S. retailers. So while UA isn't cheap right now, the fat price tag looks justified for the time being.
Last up on our Rocket Stocks list is Workday (WDAY) , the $16 billion maker of HR and finance tools used by enterprise to track where their resources are going. As companies focus on squeezing every bit out of record-high margins, WDAY's price-conscious analytics tools should continue to see strong growth.
Like most of its peers today, Workday operates under a software-as-a-service model. SaaS is attractive because it means that customers provide predictable recurring revenues on a sticky basis -- it's expensive to jump ship to a competing solution when considerable data has been fed into another platform. For a relatively young company like WDAY, the downside of the model is that most of the customer costs are recognized early, while revenues are booked over the span of the agreement. The result is front-loaded expenses that drive GAAP losses on the income statement.
As Workday grows to critical mass, that cost imbalance should work itself out, and result in sustainable profitability. In the meantime, top-line growth continues to stair-step higher, and profitability looks "less worse" every quarter. The firm's nearly $1.4 billion in net cash and investments helps to cut the nearer-term concerns over Workday's financial health. So, with rising analyst sentiment in shares this week, we're betting on this Rocket Stock.
For a technical trader's take on Workday, check out "5 Stocks Poised for Big Breakouts."
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.