So much for a reprieve from selling last week. After starting off strong, U.S. markets rolled over midday Friday, dragging the S&P 500's losing streak to nine days. That's the longest losing streak for stocks in almost 36 years.
Anyone hoping for a "new month, new market" mindset in November isn't getting their wish. The silver lining to the black clouds surrounding the stock market is that while the selling has been drawn out, it hasn't been deep. The S&P is down approximately 3% in that nine-session decline.
Meanwhile, markets remain paralyzed ahead of Tuesday's presidential election. Implied volatility, measured by the VIX Volatility Index, has been blasting higher ahead of voting, while statistical measures of observed volatility in the S&P 500 have remained mostly flat. That's a signal that market participants are anticipating the possibility of a big post-election move lower, and pricing in the risk here.
That disconnect between expectation and reality in stock volatility could create some buying opportunities in a segment of stocks that's predisposed to outperform this fall. I'm talking about the "Rocket Stocks".
In case you're not familiar, Rocket Stocks is 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 373 weeks, our weekly list of five plays has outperformed the S&P 500's record-breaking run by 79.81%.
So, without further ado, here's a look at this week's Rocket Stocks.
Leading off our list this week is $60 billion diversified chemical and materials company DuPont (DD) . At a glance, DuPont has more or less mirrored the broad market from a performance standpoint, up about 3% on a price basis since the start of 2016.
But that stat is a little misleading; since bottoming back at the beginning of January, DuPont has been rocketing higher in a bullish trend that boosts this company's gains to 33%. That momentum isn't showing any signs of fizzling out yet this fall.
DuPont owns a massive portfolio of materials tech. The firm's labs have been the birthplace of well-known brand names like Kevlar, Nomex, Tyvek, and Corian. More recently, DuPont has been expanding its agrichemical business, becoming one of the key suppliers of crop seeds in the world. The firm's culture of heavy investment in R&D continues to be a critical component of DuPont's long-term success - research and development spending has grown by more than a third in the last ten years.
DuPont is a company in transition. The spinoff of Chemours (CC) last year ramped DuPont's agriculture revenues to 40% of total sales, and the pending acquisition of Dow Chemical (DOW) stands to dramatically shift the sales mix again.
Between the boosted agriculture business (now with freshly increased valuations thanks to M&A activity in the industry lately) and DuPont's hugely successful advanced materials unit, this firm looks attractive as a long-term holding. With rising analyst sentiment in shares this week, DuPont is achieving Rocket Stock status for the first time this year.
This has been a great year for shares of $18 billion diversified manufacturer Ingersoll-Rand (IR) . For the year to date, this large-cap industrial equipment maker has rallied more than 24%, leaving the rest of the S&P 500 in its dust. That's largely thanks to the fact that Ingersoll-Rand's performance was so bad in the prior year, but shareholders aren't looking that gift horse in the mouth. More importantly, investors who don't own this stock shouldn't count out more upside in shares in the months ahead.
Ingersoll-Rand owns a diverse collection of brands that includes Trane air conditioners, American Standard bathroom fixtures, Club Car golf carts, and its namesake line of industrial equipment. Trane is Ingersoll-Rand's biggest unit, and it along with other parts of IR's Climate Solutions reporting segment make up about 75% of revenue and a similar share of operating margins. That hefty indirect exposure to the housing and commercial real estate markets has been paying off as real estate continues to ramp higher as one of the best-performing asset classes of 2016.
The extremely slow increase in interest rates has been an added boost for Ingersoll-Rand, and its cyclical, capital-intense products. As long as rate hikes from the Fed remain scant and the business cycle gets extended, Ingersoll-Rand should continue to enjoy high levels of profitability in its segment leading brands.
Essex Property Trust
Another beneficiary of low rates has been the Essex Property Trust (ESS) , a $14.5 billion apartment real estate investment trust that owns more than 59,240 units spread across 243 properties. Real estate investment trusts are practically purpose-built for dividend payouts, which means that they become comparatively more attractive in low-rate environments where income investors are searching for yield.
Because it's a residential REIT, Essex has some differences versus a conventional commercial REIT. For instance, housing landlords don't lease units on the long-term triple-net bases that are common in the industry. Instead, the firm's units are generally leased on an annual basis in locales that tend to have tenant-friendly housing laws.
Despite that, demographics make Essex's portfolio particularly attractive in the expensive West Coast geographies where the firm operates. Essex's properties are focused on the West Coast, with 84% of the portfolio split between northern and southern California, and the balance in Seattle. That combination of attractive coastal real estate markets gives the firm a portfolio in demand-heavy cities where homebuyers are getting priced out of the market.
As more Millennials start households, Essex's apartments in the strongest job markets should continue to see strong demand. Shares of ESS have remained range bound for much of 2016, peaking just shy of $235 repeatedly this year. After bottoming back at the end of last month, Essex is making another run for that potential breakout level this fall.
Cloud-based IT services stock ServiceNow (NOW) is a first-timer on our Rocket Stocks list. This $13 billion tech stock is down about 4% since the calendar flipped to January, but once again, this is an example of a stock where the year-to-date performance numbers are misleading. Since bottoming at the beginning of February, ServiceNow has rallied 76%, moving back to within grabbing distance of lifetime highs this fall.
ServiceNow's core business is IT service management. The firm helps companies save on IT costs and keep systems up and running. That software-as-a-service model means that NOW collects consistent recurring revenues. Because of the deep integration that enterprise IT departments need to undertake to use ServiceNow, those revenues are also very sticky.
ServiceNow has been wringing even more value out of that customer Rolodex lately, using its expertise on the IT side of things to move into other departments of customers' operations, including HR, finance, and marketing. The net result? A 47% year-over-year growth rate.
Financially, ServiceNow is in excellent shape. The firm currently has approximately $600 million in net cash and investments on its balance sheet, enough to cover about 5% of the firm's market capitalization at current price levels. More importantly, that big cash cushion serves as an important risk reducer as ServiceNow continues to invest in growth.
Last on our Rocket Stocks list this week is $14 billion utility stock FirstEnergy (FE) . FirstEnergy is one of the biggest publicly-traded utility companies on the market, serving more than 6 million customers in 6 states. FirstEnergy is a totally integrated energy company that also owns one of the largest transmission networks in the U.S., with 24,200 miles of electrical lines and 13 gigawatts of generating capacity.
FirstEnergy's exposure to mid-Atlantic states is attractive. The firm's customer sales mix is nearly evenly split between residential, commercial and industrial users, and it operates in a region with consistent power demand and reasonable regulators. While FirstEnergy does have exposure to some non-regulated businesses (such as merchant generation), regulated distribution and transmission make up about 85% of earnings, reducing the fluctuations in its income statement.
Utility stocks and dividends go hand-in-hand. For that reason, it shouldn't come as a big surprise that FirstEnergy is another beneficiary of low interest rate policies, or that its 4.3% dividend yield is highly sought after right now. With rising analyst sentiment in FirstEnergy this week, we're betting on shares.