BALTIMORE (Stockpickr) -- Corporate earnings continue to be the big driver of market prices this week, as earnings season hits its final stretch. And overwhelmingly, this earnings season has stomped Wall Street's expectations for the quarter: as I write, a full 80% of S&P 500 components has beaten Q3 earnings estimates.
Those low expectations have helped to fuel the recent rebound in stocks; the average stock in the S&P has jumped more than 4% in reaction to earnings this quarter.
This week, the big stock indices will be testing high ground once again -- that's because the S&P and the Dow each made new record closes on Friday. As sentiment continues to build in favor of stocks in November, the chances of one-upping those record look good this week. To take full advantage, we're turning to a fresh set of Rocket Stocks worth buying 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 273 weeks, our weekly list of five plays has outperformed the S&P 500's record run by 79.64%.
Without further ado, here's a look at this week's Rocket Stocks.
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Up first is Apple (AAPL) , a name that's been handily outperforming the rest of the broad market in 2014. Since the calendar flipped to January, this $639 billion tech behemoth has rallied more than 36%, stomping the S&P's otherwise solid 10% move by comparison. But the upside in Apple isn't over yet.
Apple has made the transition in recent years from computer stock to consumer electronics stock, with mobile devices like the ubiquitous iPhone contributing a bigger share of profits than the Macintosh. Even so, the Apple ecosystem is designed to be interoperable, and that means that iPhone and iPad sales help boost the number of Macs the firm ships each quarter (and vice versa). Many investors forget, but Apple also happens to be the world's largest online music seller, though its iTunes store, another integrated part of the integration puzzle. New software features like Continuity, introduced in last month's OS releases, should help drive the benefits for consumers who choose to "keep it in the family" with Apple devices.
By tightly integrating Apple hardware and software, Apple is able to command premium pricing without the need for technically superior hardware specs. As a result, the firm is one of the few that can earn meaningful profits today in commoditized segments like smartphones and PCs, earning the majority of the smartphone industry's profits, despite a smaller market share than Android. A staggering $120 billion net cash and investment position, coupled with an aggressive capital return plan for shareholders, bodes well in this low-interest rate environment.
With rising analyst sentiment in Apple this week, we're betting on shares.
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Philip Morris International
As the second-largest tobacco company in the world, $137 billion cigarette company Philip Morris International (PM) has the whole "sin stock" thing down pat. PM owns nearly a third of the ex-China market for cigarettes, with some of the most popular global brands under its corporate umbrella. At the top of the pack is the firm's flagship Marlboro label, which accounts for more than a third of volume. Other brands include L&M, Philip Morris, and Parliament.
But don't mistake PM for the company manufacturing Marlboro cigarettes here in the U.S. -- this firm, which spun out from Altria (MO) in 2008, is 100% ex-U.S. That's actually spectacular positioning, because it means that PM is the part of legacy Altria's tobacco business that's actually still growing. At the same time that cigarette sales here in the U.S. die a slow death, PM's emerging market business is seeing quick growth rates. The combination of a sticky product (consumers don't tend to switch cigarette brands often), and premium positioning with Marlboro means that PM earns thick net profit margins (28% last year) for its trouble.
The strong dollar has been a thorn in PM's side in the last few years -- since the firm earns revenues in local currencies and then reports in dollars, any upside in the greenback presents currency risk. Even so, growth in the firm's core emerging markets has outpaced the dollar's climb in this environment. Another mitigating factor is PM's huge 4.5% dividend yield -- with low interest rates likely to persist for some time, that yield should look increasingly attractive as time wears on.
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By chance, our next Rocket Stock also happens to have "sin stock" status. That's because we're taking a look at defense contracting giant Lockheed Martin (LMT) . Lockheed Martin happens to be the only name on our Rocket Stocks list that actually manufactures rockets; the firm is one of the biggest defense contractors on earth, building everything from fighter jets to surveillance equipment to armored vehicles.
In the last decade, Lockheed has worked on securing government contracts outside of the DoD, using its expertise to provide IT services to the Department of Energy, and the FAA with flight service staffing, for example. Iraq and Afghanistan have been major drivers of government demand for LMT's products and services -- and despite the occasional congressional budget scare, those needs are likely to persist for some time. Likewise, Lockheed has historically been able to secure permission to sell military equipment to our allies, diversifying the firm's fortunes away from Uncle Sam's pocketbook.
That said, don't expect DoD spending to diminish in importance for Lockheed Martin's overall business. The firm's bread and butter will continue to come from defense sales. Like other sin stocks, Lockheed sports a hefty dividend payout -- the firm currently pays a 3.2% yield at current levels. With rising analyst sentiment in Lockheed Martin, we're betting on shares this week.
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PNC Financial Services Group
PNC Financial Services Group (PNC) is having a good year in 2014: shares of the $46 billion bank are up more than 14% since the calendar flipped to January. Add dividends, and PNC's total returns hop up to 16.6% year-to-date. And this Rocket Stock looks poised to continue to outperform as we head into the final stretch of the year…
PNC is one of the biggest regional banks in the U.S., with 2,700 branches spanning 17 states and Washington D.C. Beyond banking, the firm also owns a very attractive asset management business with more than $131 billion in assets under management. PNC is well-capitalized, and that low-cost deposit base means that it's able to earn meaningful returns through its core lending business. An increased focus on operational efficiency should translate into significantly bigger company-wide profits as PNC absorbs smaller banks into its network.
A rising tide lifts all ships in the asset management business -- as a buoyant equity market helps to drive PNC's asset base higher, the firm should earn bigger fees. That's an attractive business because that fee revenue can increase without impacting PNC's exposure to risk. Anything that helps to de-risk PNC's exposure to interest rates in this environment is a positive for shareholders. Momentum is clearly on buyers' side this fall -- look for higher levels in PNC before the end of the year.
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Last up on our Rocket Stocks list is Intuitive Surgical (ISRG) , the robotic surgical system manufacturer. Intuitive Surgical makes the da Vinci system, which lets doctors perform less-invasive surgeries than are possible by hand. Currently, Intuitive has more than 3,000 da Vinci systems installed in hospitals around the globe.
Intuitive Surgical operates on a "razor and blade model", albeit on a much bigger scale. For example, hospitals that make the big investment into a da Vinci system continue spending money with Intuitive on instruments and service fees, which are incredibly sticky and recurring. Hospitals acquire robotic surgery systems to increase their technical capabilities, and then they need to use those systems to justify the cost -- that means the number of procedures performed with the da Vinci system are high.
There's a deep moat around da Vinci. Not only are hospitals more likely to buy the standard bearer in robotic surgery, but specialists who have experience with the device are more likely to get behind the acquisition of a familiar platform. Make no mistake, ISRG isn't cheap by any conventional stock valuation metric -- but this stock's momentum has been on fire since the middle of May, and the combination of an attractive core business and buyers in the market for shares should help float this stock through the psychologically significant $500 level in November.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author was long AAPL.
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