BALTIMORE (Stockpickr) -- Earnings season is continuing to kill it this quarter. While all eyes ended the week on focused on the Fed and then the Bank of Japan's stimulus announcement, publicly traded companies have been quietly stomping analyst expectations across the board.
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Of the 363 S&P 500 components that have reported their numbers so far this earnings season, a whopping 81% have posted profits that beat Wall Street's expectations for the quarter. That's a staggering result. And with few exceptions, earnings beats are being followed up by big pops in those individual stocks.
The Dow and the S&P 500 both ended at new all-time closing highs on Friday, signaling that the correction in stocks to start October was just that - a correction. So, with momentum looking strong as we head into November, we're turning to a new set of Rocket Stock names to buy.
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 272 weeks, our weekly list of five plays has outperformed the S&P 500's record run by 80.23%.
Bank of America
Up first is Bank of America (BAC) . After a rough start to 2014, BofA has been building momentum since the beginning of the summer, climbing more than 18% since the end of May. For comparison, the S&P 500 is only up 7% over that same stretch. And with some big black clouds resolved this year, BofA has a much clearer path to bigger profits ahead of it.
For a while, Bank of America has been the worst-in-breed of the big U.S. banks. The firm's acquisitions of Countrywide and Merrill Lynch in 2008 greatly increased BofA's mortgage book and securitization business, but it also exposed the firm to huge legal liabilities that have been an ongoing material drag on earnings. The firm's record $16.65 billion settlement with the government earlier this year resolves one of the biggest bearish pressures on shares.
From here, Bank of America has the scale to grow its margins materially in the years ahead -- the relatively commoditized nature of the banking business means that size matters, and BAC certainly has size. The prospect of higher interest rates, however far down the horizon, is another big potential catalyst for BofA; as rates rise, so too will the spread that the firm can earn on its loan book. Meanwhile, a buoyant equity market means good things for revenues over at the firm's investment banking and wealth management arms.
With rising analyst sentiment in Bank of America this week, we're betting on shares.
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$39 billion enterprise software company Salesforce.com (CRM) has seen its share price grow faster than the rest of the market in 2014: since January, this stock has rallied nearly 16%, leaving the S&P's otherwise solid 9% climb in the dust. And as Salesforce slowly transitions from high-growth mode to profit mode, investors should see more upside ahead...
Salesforce.com is the largest provider of customer relationship management software, with more than 100,000 customers. Those customers run its mission-critical business applications to interact with customer lists, doing everything from sending newsletters to tracking sales. Because the Salesforce platform is directly linked to bringing in revenue, the cost is easy to justify, and the firm has a deep economic moat. Salesforce was one of the first big enterprise tools "in the cloud" - as a result, the firm has a sticky recurring revenue base. Firms who invest time and money into integrating CRM's platform aren't likely to jump ship to a competitor.
Historically, Salesforce has focused on growth above profitability, spending as much as it could on customer acquisition at the expense of the bottom line. More recently, though, management has become more receptive to investors' demands for profits, and that fact should help to build value in shares of CRM in the coming quarters.
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LinkedIn (LNKD) popped more that 12.8% on Friday, buoyed by a better-than-expected 49-cent per share profit for the third quarter, and attractive estimates for Q4. That move was enough to bring LNKD positive for 2014, a nice change after a very choppy year of trading. While investors pay more attention to LinkedIn's more prominent social networking peers, this $28 billion stock is quietly making leaps and bounds in its business.
LinkedIn is a professional social network that connects more than 300 million members with colleagues who can help them land jobs, fill them, or figure out business problems. LinkedIn's advantage can be summed up in a sentence: It's the only social network that's actually monetized helping users do what they want to do.
While other social media firms earn revenue by distracting their users from what they're trying to do (and getting them to click on ads while stalking their friends, for instance), LNKD makes money by helping users with the exact task they're trying to accomplish: find a job, network or hire someone. That may sound like a small distinction, but it's not. And as firms like Twitter (TWTR) search for new ways to generate revenue, LinkedIn is grabbing huge business-to-business ad and recruitment spending.
The realities of today's job market means that LinkedIn has become more of a necessity for employment candidates. That's particularly true as frustrated users get sick of the older legacy job search websites. Financially, LNKD is in good shape, with more than $2.3 billion in cash and zero debt. With rising analyst sentiment in shares of LinkedIn this week, we're betting on shares.
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A buoyant housing market and record low interest rates have provided a windfall for investors in AvalonBay Communities (AVB) -- shares of the $20.5 billion housing REIT have rallied more than 31% since the start of January. Many income investors go gung-ho over conventional commercial REITs, while ignoring the housing REITs; that's a big mistake. AVB is one of the best-run residential real estate investment trusts, with interests in more than 80,000 units spread across some 250 apartment communities.
It's true that housing REITs don't have many of the same protections from tenants that commercial landlord REITs do. But that hasn't stopped AVB from earning meaningful returns. The firm focuses its portfolio on affluent metro areas like New York and San Francisco, and as a result, it has been able to maintain high occupancy rates for its apartment homes.
One of AVB's biggest benefits is its pipeline. Instead of acquiring existing apartments, the firm holds development rights to approximately 45 communities as of its most recent financial filings. That hands-on strategy means that AVB is able to collect bigger long-term returns on investment than a mere owner-operator could.
Right now, AvalonBay pays out a 3% dividend yield -- if the Fed follows the Bank of Japan's lead with another round of QE, that high dividend yield could make AVB one of the bigger beneficiaries of new money pouring into stocks.
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Last up on this week's Rocket Stocks list is Delphi Automotive (DLPH) , the $20 billion auto parts supply giant. Even if you don't know the Delphi name, there's a good chance you've seen its products: the firm supplies automakers with everything from electrical components and safety parts to powertrain systems. Former parent General Motors (GM) accounts for approximately a fifth of sales today.
As goes the car business, so goes Delphi. That's been a very good thing post-2009, as record-low interest rates and an aging global car fleet helped to spur major growth in car sales that continues today. Delphi enjoys a relatively strong moat -- since its customers must integrate Delphi's offerings deeply into their own car designs, it's difficult for an OEM like GM or Toyota (TM) to simply switch to a competitor's part.
Much like its customers, DLPH has made an about-face in terms of financial health post-2008. Not only has the firm been consistently profitable, but it also now sports a balance sheet with more than half of its total debt load covered by cash on hand. That lack of balance sheet leverage makes this Rocket Stock's performance look a whole lot more attractive this fall.
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, author had no positions in the names mentioned.
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