5 Rocket Stocks to Buy to Avoid the Selloff


BALTIMORE (Stockpickr) -- U.S. markets corrected last week, a move lower that was marked by a couple of particularly nasty sessions. The good news is that the selling wasn't as bad as it could have been. The S&P 500 shed only 1.39% between Monday's open and Friday's close.

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The bad news is that this doesn't look like the end of the selloff. Stocks are pointed lower again this morning, which is not completely unexpected -- they've been trading in a well-defined price channel for the better part of the last two years, and after hanging out near the top of their range, a retest of the bottom was par for the course.

In other words, we're still in a "buy-the-dips market," but patient investors need to wait for the dip.

So to position ourselves for upside, we're turning to a new set of "Rocket Stocks" that look ready for blastoff 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 267 weeks, our weekly list of five plays has outperformed the S&P 500's record run by 80.32%.

Without further ado, here's a look at this week's Rocket Stocks.

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Up first is Facebook (FB) , a stock that hasn't made many appearances on our Rocket Stocks list lately. Facebook started the year as a laggard, but the sentiment tide is turning in this name, and despite the downside risks, shares are in full breakout mode this week.

Facebook is the largest social networking website in the world. The firm boasts more than 1.3 billion monthly active users, who spent more time on Facebook -- connecting with friends, playing games and talking about their interests -- than on any other Web site. That personal connection means that Facebook has a detailed picture of the users on its site -- a picture that it can use to drive targeted advertising revenues.

If Facebook can break its data apart from its own Web site, it has a huge potential cash cow in terms of profiling individual consumers for marketers. And while that may draw some privacy concerns, the firm's existing user base hasn't balked yet.

There's another huge growth opportunity internationally for Facebook. Even though 80% of users are ex-U.S., the firm only earns half of its revenue from overseas. That's a big potential revenue catalyst to look out for in the quarters ahead.

Facebook runs a relatively lean machine. Last quarter, for instance, Facebook converted 27 cents of every ad dollar into net profit for investors. And while shares are far from cheap right now, they're not showing any signs of letting up.

Facebook is one of George Soros' top holdings as of the most recently reported quarter and also shows up in Julian Robertson's Tiger Management portfolio.

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$53 billion health care company Allergan (AGN) is seeing a blockbuster year in 2014. Since the calendar flipped to January, shares of the firm have rallied 60%, boosted by strong performance and an unrequited takeover offer from Valeant Pharmaceuticals (VRX) . While the takeover attempt rules Allergan's news cycle, this stock has quietly been making moves, posting new all-time highs just last week.

Allergan owns a diversified health care business, which produces a range of pharmaceuticals as well as medical devices. The firm's best-known product name is probably Botox, the popular brand of neuromodulator that's become a popular treatment for patients who want to reduce wrinkles without the invasiveness of cosmetic surgery. Even though Botox faces generic competition, high brand recognition and the introduction of new indications for the drug have kept AGN's revenue stream flowing. Down the road, Allergan's eye care business has the potential to grow considerably when its macular degeneration treatments are ready for primetime.

Right now, AGN is in the process of acquiring Salix Pharmaceuticals (SLXP) in a deal that's primarily designed to fend off Valeant's unwanted advance. While there's value to be unlocked in that deal, management needs to walk a fine line between fighting for more cash for AGN investors and throwing away Allergan's own cash to spite VRX. For investors willing to take on a little more event risk, there's still upside in AGN this week.

Allergan is one of the John Paulson's top holdings as of the most recently reported quarter, and it also shows up in Bill Ackman's Pershing Square portfolio.

Must Read: 10 Stocks Billionaire John Paulson Loves in 2014

Northrop Grumman

Virginia-based Northrop Grumman (NOC) is the one name on our list of Rocket Stocks that actually happens to make rockets.

The firm tips the scales as one of the largest defense contractors on the planet. It earned almost $25 billion from Uncle Sam last year, selling everything from drones and bomber aircraft to IT services. That product mix has been well-thought-out. The firm unloaded its dominant but capital intense shipbuilding business in 2011, a move designed to align NOC's business more with the high-growth segments of the defense space, including cyber security, UAVs, and surveillance.

Northrop's expertise in a wide number of similar businesses provides some big overlap opportunities. In other words, NOC can use its expertise in conventional military aircraft to build a better unmanned drone than a less integrated firm could, wringing bigger profits from its contracts than before. And while the firm does experience some customer concentration risk from the fact that the Federal government provides around 90% of Northrop Grumman's revenues, an abundance of mission-critical offerings and the fact that individual government agencies award individual contracts means that the risks of a sudden negative impact are minimal.

Financially speaking, NOC is in good shape. Despite the fact that the firm still operates in capital-intense businesses, its balance sheet has minimal leverage, and net profitability consistently exceeds 8% of revenue. Northrop Grumman's P/E ratio of 14 puts it on the low side of the valuation spectrum right now, particularly when its 2% dividend yield is factored in.

Must Read: 3 Big Stocks With Big Volume to Trade for Big Breakouts

PPG Industries

You've probably used products from coating and glass company PPG Industries (PPG) , even if you didn't realize it. That's because the firm's coatings are used in a bevy of applications, from specialty coatings used to protect aircraft and car surfaces to the paint used in your house. It's the specialty group that provides the biggest advantages for PPG, as proprietary coatings give the firm pricing power (and thus deeper margins).

Because industrial customers work with PPG to develop specialized coatings for their processes, switching costs are high and customers are sticky. That's a big part of the reason why PPG is able to collect net margins close to 10% from what most people would consider to be a boring business. Right now, the firm earns more than a quarter of its sales internationally, a number that's set to rise thanks to the decision to acquire Mexican coatings company Comex for $2.3 billion.

PPG's financials are in good shape as well. Right now, the firm carries approximately $3.3 billion in net cash and investments, enough to completely offset its $3.3 billion debt position. That balance sheet position will shift a bit when the Comex deal closes, but the bigger exposure to Latin America is worth the cost. With rising analyst sentiment in shares of this Rocket Stock, we're betting on PPG this week.

Must Read: Warren Buffett's Top 10 Dividend Stocks

Best Buy

Last up is Best Buy (BBY) , a name that's been a stranger to our Rocket Stock list for a while now. With big changes underway at the nation's biggest electronics retailer, BBY looks ready to regain lost ground in its stock price -- and that means that this store chain won't just be Amazon.com's (AMZN) showroom anymore.

Best Buy's big differentiator is the fact that this chain has more than 1,400 brick-and-mortar stores. In fact, the company estimates that 70% of Americans are within 15 minutes of one of its stores. New sales tools (like an improved Web site) have been designed to highlight Best Buy's biggest benefits, such as the fact that consumers can try products and walk out of the store that same day with their new electronics in hand, without waiting for the delivery man.

And just as important, nearly $1 billion has been removed from the firm's cost structure in a move to become more profitable in good times and bad ones. The result is a leaner store chain that actually has a narrow moat. The question is whether management will continue to move in a direction that lets it stand apart from the competition. After selling off hard to start the year, BBY looks like a good reversal play this fall.

Must Read: How to Trade the Market's Most-Active Stocks

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.





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At the time of publication, portfolios managed by the author were long BBY. Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation. Follow Jonas on Twitter @JonasElmerraji

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