BALTIMORE (Stockpickr) -- 2015 has been a stealth bull market. While the price action hasn't really seemed all that impressive on the surface -- the big S&P 500 index is just 2.78% more than a third of the way into the year -- some stocks have actually been working.
In fact, as I write, one in five S&P 500 stocks is up more than 10% year-to-date.
That's a pretty substantial chunk of the market that it really pays to own right now. But that's all in the past at this point. To find the next set of stocks that's primed to outperform here, we're turning to a new set of Rocket Stocks that look ready for blastoff in May.
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 298 weeks, our weekly list of five plays has outperformed the S&P 500's record run by 81.45%.
Without further ado, here's a look at this week's Rocket Stocks.
Up first is payment card network Visa (V). Visa has shown investors alright performance in 2015, up about 6% since the start of the year -- but its price action has been heating up more recently. And some big macro tailwinds are setting the stage for momentum to keep heating up in the second quarter.
Visa is the standard bearer in the global electronic payments business. Visa handles about half of all credit card transactions and three-quarters of all debit card transactions, collecting fees on an absolutely huge volume of payments. Globally, the world still has considerably further to go in adopting electronic payments on a large scale, and that ample clear runway gives Visa significant growth potential in the years ahead.
Financially speaking, Visa is in excellent shape. Because the firm is only the transaction network, not the card issuer, it doesn't actually lend money. Because of that, the firm doesn't have exposure to credit risk from consumers who carry Visa-branded cards. Visa's balance sheet is debt-free, plus another $8.5 billion in net cash and investments. That's enough to cover approximately 5% of Visa's current shares outstanding, a meaningful risk-reducer.
With rising analyst sentiment in shares of Visa this week, we're betting on this payment stock.
April showers could be bringing May flowers in shares of $47 billion defense contractor General Dynamics (GD). After shares corrected in the first part of the year, they've been in rally mode in the last few weeks, shoving up to new 2015 highs as recently as Friday. There's a lot to like about this big defense firm right now.
For starters, General Dynamics is one of the most entrenched contractors in the Department of Defense, manufacturing everything from submarines to armored vehicles to computer systems. Those specialized, capital-intense products mean that competition is somewhat limited (for example, GD owns three of the six major submarine shipyards in the U.S., limiting competition for big-dollar sub fleet upgrade projects). About 60% of GD's revenue come from the U.S. government. The balance comes from allies and GD's Gulfstream aerospace division, which manufactures medium and large-category jet aircraft.
Plummeting fuel prices and aging fleets have been major positives for GD in the last year, both in the firm's defense business and its business jet operation. Likewise, the recent reduction in General Dynamics' reliance on the U.S. government is a positive that pulls some of the political risks off of the firm's income statement.
With positive first-quarter earnings behind it, look for GD to keep boosting its profitability and performance in 2015.
Adobe Systems (ADBE) is a software company in transition -- and that's a very good thing for investors right now. Adobe makes software used by creative professionals to create images, videos, page layouts and Web sites -- and that big role in content creation gives Adobe a very crucial role in the creative pro's toolbox. Adobe's flagship content creation applications include Photoshop, Acrobat, Dreamweaver and After Effects, among others.
In the past, Adobe sold its software under a license model. While that model worked, the high price tag of a license created high barriers to entry for some clients and made piracy a major issue. More recently, though, the firm has been transitioning customers to the Creative Cloud, a recurring subscription model that provides the latest version of its software to users at a low monthly cost. Instead of paying thousands of dollars for a retail box version of Adobe's Creative Suite, Creative Cloud access can cost as little as $50 a month.
The subscription model also provides two additional important benefits for Adobe. It helps to smooth revenues by spreading sales across the business cycle (and not just the upgrade cycle), and it effectively guarantees that all customers are upgrading on every new software iteration. Adobe's software is a perfect candidate for a cloud-based subscription model, and the firm is ahead of schedule in its transition plan.
We'll get a peek at second-quarter performance about a month from now. Stay tuned.
So far, 2015 has been a rough time to be a shareholder in Seagate Technology (STX). Since the calendar flipped to January, this $18 billion data storage stock has shed about 14% of its market value, underperforming the broad market during a stretch where performance has been hard to come by in the first place. But it's a little premature to count Seagate out just yet. Here's why.
Seagate Technology is one of the biggest manufacturers of computer hard drives on the planet, adding up to a 42% market share in the hard drive business. The firm's deep relationships with original equipment manufacturers have enabled it to book big volume deals, ensuring that Seagate-branded drives fill a big chunk of the demand growth the computer storage industry has been enjoying lately.
Today, hard drives make up about 95% of Seagate's total business, but the firm has been investing in NAND flash technology, building hybrid drives that pack additional speed in exchange for bigger margins. As the whole industry moves away from traditional hard disks, STX's big relationships should keep its products in new PCs.
But investors have been so concerned about potential encroachment from pricier solid state drives that they've allowed STX to trade cheaply. Currently, the firm's shares trade for just 10 times earnings. Considering the frothy market valuations being collected elsewhere in the market right now, that's a fire-sale price tag on a stock that's still making money at a brisk pace.
Now looks like a good opportunity to take advantage of the bargain in shares.
Stanley Black & Decker
Last but not least on our list is toolmaker Stanley Black & Decker (SWK).
Anyone who's ever set foot into a home improvement store knows the Stanley and Black & Decker names. The firm also owns a collection of other familiar brands, ranging from DeWalt to Mac Tools to Bostitch. Scale is a big advantage from the merger of Stanley and Black & Decker back in 2010; because the firm manufactures such a large chunk of home improvement retailers' inventory, it carries some semblance of pricing power. That's helped a great deal by the fact that consumers, prosumers and professionals tend to be brand loyal when tool shopping.
In the past, SWK has looked outside of its core tool business for growth. That was one of the big drivers of the firm's hefty investment in its security segment. Near-term, look for SWK's industrial business to be an exciting opportunity, as the company courts energy and infrastructure companies.
Don't underestimate the DIY tool business either. 2015 has been a great year for real estate values, and as homeowners see their equity balances tick higher, they've become more and more willing to invest in household projects. SWK should collect a big chunk of the growth that home improvement retailers are enjoying in 2015.
So with rising analyst sentiment in shares of SWK this week, we're betting on this Rocket Stock too.