BALTIMORE ( Stockpickr) -- Earnings season is wrapping up this week -- so far, 463 of the S&P's 500 components have reported their numbers to Wall Street this quarter. And the results have been overwhelmingly positive so far.
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To date, a full 80% of stocks in the big index have posted bigger profits than analysts were expecting. That's a big contributor to the S&P's 5.4% rally since earnings season kicked off on October 8. From a momentum standpoint, stocks are well-positioned to keep up their upside action as we head into the final stretch of 2014 -- but some stocks are better suited to outperform than others.
To find the best bets, we're turning to a new set of Rocket Stocks to buy as earnings season ends…
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 274 weeks, our weekly list of five plays has outperformed the S&P 500's record run by 80.47%.
Without further ado, here's a look at this week's Rocket Stocks.
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Johnson & Johnson
Yes, Johnson & Johnson (JNJ) is a big, boring blue chip stock. But its price action has been anything but boring so far in 2014 -- in fact, this $302 billion healthcare name has trounced the S&P's average performance year-to-date. Since the calendar flipped to January, JNJ is up more than 18% excluding its dividend. That huge relative strength compared to the rest of the market bodes well for the next month and a half.
From a macro standpoint, the hefty 2.6% dividend yield on JNJ's shares also looks extremely attractive -- with interest rates likely to hover near zero for longer than most market participants expect, that high relative yield on JNJ should keep shares sought after.
Johnson & Johnson is the world's biggest healthcare company. The firm makes pharmaceuticals, medical devices, and consumer products. On the consumer end of the spectrum, some of its most familiar brands include names like Band-Aid, Tylenol, and Neutrogena. But while JNJ is best known for its consumer brands, pharma and medical devices contribute a bigger share of sales.
That income statement diversification is a big plus for JNJ -- because the company isn't dependent on any single unit, it's very well positioned for unexpected regulatory or product-related speed bumps in any single business line. With huge cash generation and a prototypical blue chip standing, we're betting on shares of Johnson & Johnson this week.
Salesforce.com (CRM) couldn't be much more different than JNJ. Instead of pursuing profits, Salesforce has used revenue growth as its keystone metric, spending big bucks on customer acquisition, and trading off profitability in exchange for a ballooning top line. The idea behind that strategy is that CRM just needs to flip a switch to ratchet its margins higher, and as long as shareholders are willing to pursue a growth-at-all-costs game plan, the approach makes sense.
That's because Salesforce enjoys a captive audience of recurring subscribers in its deep-moat software business. The firm's namesake customer relationship management platform enables 100,000-plus customers to run business applications that interact with their customer lists, doing everything from sending newsletters to tracking sales. That mission-critical nature of Salesforce's offering digs a big economic moat. So does the firm's position as one of the first major business application vendors to focus on the cloud.
Financially speaking, CRM is in pretty good shape. The firm sports a balance sheet that's almost debt-neutral (that is, cash and investments just about cover its $2.3 billion debt load), and the firm's top line has grown at a breakneck pace over the past several years. While Salesforce is far from a value stock, it's ready to test new highs this month.
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Airline stocks are having a spectacular run in 2014, and Southwest Airlines (LUV) is no exception -- this $26 billion air carrier has more than doubled since January. Southwest pioneered the shorter-haul point-to-point route model, eschewing the hub-and-spoke network that legacy carriers still use today. The firm's focus on being the low cost leader has made it one of the best-run airlines in the industry for the past four decades -- in fact, LUV has the remarkable distinction of 41 consecutive years of profitability.
In the last few years, Southwest has been working hard to grow beyond its existing business. The firm acquired AirTran in 2011, and it plans on having AirTran's operations fully integrated under the Southwest banner by the end of the calendar year. Likewise, it's begun to offer more lucrative international and long-haul routes, flying to vacation destinations like Cancun and Aruba on the international front, and Hawaii on the domestic long-haul front. Those destinations should help to boost LUV's margins, particularly as leisure travel rates continue to climb.
Southwest's operational prowess is second to none. The firm operates 631 Boeing 737 aircraft, sticking with a single type to keep maintenance and training costs lower. The introduction of the 737 MAX to the fleet in 2017 should have a material impact on reducing fuel costs, the single largest expense in the airline business. With rising analyst expectations this week, we're betting on shares of LUV.
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Car parts retailer O'Reilly Automotive (ORLY) tips the scales as the second-biggest parts store chain in the country. The firm's 4,000 stores are spread across the country, thanks in large part to some transformational acquisitions over the past few years that opened up territories where O'Reilly previously didn't have exposure. The firm's stores sell to do-it-yourself consumers as well as professional shops -- it's that commercial side of the market that ORLY has been hitting hard in recent years.
There are some big macro tailwinds in the auto parts business right now. For instance, the average fleet age in the U.S. is currently higher than ever before -- which means that car owners are trying to get more life out of their rides today, and things are more likely to break.
Despite O'Reilly's growth-by-acquisition appetite, the firm currently carries a very tenable debt load -- just $1.4 billion. And that debt is offset by nearly $300 million in cash that provides considerable protection against the unexpected. Typically, we'd expect to see more leverage on the balance sheet of a retail chain (it's not cheap to grow to 4,000 U.S. stores, after all), but ORLY's low debt levels mean that it's able to consistently earn double-digit net profit margins. Shares are pressing into new highs as I write -- a move above the important $180 resistance level should help propel shares to a test of $200.
Sometimes, boring is beautiful when it comes to your portfolio. That's certainly been the case with utility stocks in 2014 -- driven by prolonged low interest rates and hungry income investors, utility stocks have been in rally mode over the past year. A perfect example of that comes from Consolidated Edison (ED) , a New York-based electric utility that boasts a whopping 4% dividend yield today.
ConEd is the incumbent power company in New York City and much of southeastern New York, New Jersey, and part of Pennsylvania. All told, the firm serves more than 3.6 million customers in its service region with electricity, gas and steam. The area where ConEd operates is high-demand, and as a result it produces very predictable performance numbers for the firm's regulated utility units. That predictability is a very good thing for the stability of ConEd's fat dividend payout -- a payout that the firm has been able to increase each year for more than four decades now.
The flip-side of ConEd's huge regulated utility business is that it's subject to the whims of regulators -- so while that's historically worked out well for the company, politics could get in the way of future rate increases. With ConEd's big investments in infrastructure, the firm hadn't had too much trouble justifying rate hikes in the past. Even though ConEd isn't the most exciting name in the world, this Rocket Stock is well positioned to perform as we head into 2015.
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.
At the time of publication, author had no positions in the stocks 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 that 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