Buckle up for a rate hike this week -- at least, that's the message investors are sending to the market. The Federal Reserve's Open Market Committee is expected to announce a boost to interest rates on Wednesday, an event that's basically being priced in at 100% odds according to futures prices.
In other words, any surprises wouldn't be handled well by Mr. Market.
On the other hand, in the very likely scenario that Janet Yellen and company offer an announcement that's in-line with investors' expectations, we could see an extension of the "Trump rally" into the New Year. That would be a very good thing for U.S. stocks.
To take advantage of the bullish bias in the stock market this week, we're turning to a fresh set of Rocket Stocks to buy before the Fed's rate hike.
In case you're not familiar, 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 377 weeks, our weekly list of five plays has outperformed the S&P 500's record-breaking run by 79.29%.
So, without further ado, here's a look at this week's Rocket Stocks.
First on this week's list of Rocket Stocks is $211 billion telco Verizon Communications (VZ - Get Report) . At a glance, Verizon might seem like a curious pick to buy before a rate hike - after all, as one of the highest-yielding stocks in the Dow Jones Industrial Average, this carrier is typically negatively impacted by higher rates.
But the bigger story here is Verizon's price momentum. With shares up more than 10% in the past month, buyers are clearly in control of shares at the same time a rate hike is being priced into the market.
Verizon is the biggest cellular phone carrier in the country, with more than 113 million retail wireless connections. The firm is also the local phone company for around 25% of the U.S., providing fixed line phone, TV, and Internet services. Verizon's scale comes with some big competitive advantages as the carrier wars heat up.
For example, since Verizon can spread huge network upgrade costs for cellular towers and fixed-line installs across a massive base of subscribers, it's able to provide network quality that smaller rivals can't. As cellular service in the U.S. continues to become commoditized, Verizon's network is one of the few palpable differentiators left.
Verizon's fixed-line business has been undergoing some major changes in the last few years. Verizon has been selling off its legacy wire-line business, while also investing in its next-gen FiOS fiber-to-home network. That shift looks a little more surgical than the acquisition-spree that main rival AT&T (T - Get Report) has been undergoing. Meanwhile, the jury is still out on Verizon's pending acquisition of Yahoo!'s (YHOO) operating assets, but the buyout isn't particularly earth-moving in size, a fact that provides an extra margin of safety for shareholders.
UnitedHealth Group (UNH - Get Report) is another large-cap stock that's been enjoying some very bullish price momentum in 2016. Shares are up more than 36% so far this year, and they're testing new lifetime highs this week. That upward pressure on UnitedHealth's share price isn't showing any signs of slowing down as we get deeper into December.
UnitedHealth is the biggest managed care provider in the U.S., with more than 45 million heal members under its coverage. This is another situation where scale matters a lot: UnitedHealth's huge size means that the firm can negotiate more attractive contracts with health care providers, keeping costs low and attracting even more members. The company has been building its scale in the pharmacy benefit management side of its business, which now weighs in as one of the biggest in the country with more than a billion prescription claims processed each year.
It's hard to totally divorce UnitedHealth from the politics right now. Health care regulations have been a moving target in the last several years, and the Trump administration has indicated that's not changing as they work to reverse Obamacare.
A shift away from traditional insurance and over to more back-office services helps to insulate UnitedHealth somewhat from those continual shifts; that said, health care providers are likely to be one of the net winners under Trump administration policies, helping to fuel some of the price tailwinds this stock has enjoyed in the last month.
The industrial sector has been another notable winner from the Trump rally - and $109 billion conglomerate 3M (MMM - Get Report) has been a strong performer, up more than 5% since election day. 3M is another notable stock that's testing new lifetime highs this winter, providing a very bullish price trajectory for shareholders.
3M owns a handful of well-known household and office brands, including products like Scotch tape, Post-it Notes, and Ace Bandages. But 3M makes most of its money outside of the consumer space, through product lines that include respirators, industrial adhesives, and heavy-duty filters. Once customers start buying 3M's products, they keep on buying -- almost half of 3M's product mix is made up of consumables, a fact that provides a hefty source of recurring revenues at attractive margins.
Because 3M's business is technology-driven, it benefits from relatively low capital needs and high levels of profitability. For example, 3M's products aren't particularly costly to produce, but because it owns a large IP portfolio, it can sell its proprietary tech at higher prices. Management understands the need to keep that product development cycle spinning, typically plowing around 5% of sales back into developing new products. Between a history of returning capital to shareholders in the form of dividends and the price momentum in shares here, 3M looks well-positioned to outperform this month.
A big macro trend is in play in shares of auto parts retailer AutoZone Inc. (AZO) right now. Currently, the median age of a car on the road in the U.S. is 11.4 years - the oldest it's ever been since the Department of Transportation started collecting data. With the average selling price of a new car approaching $27,000 today, higher interest rates could incentivize car buyers to put off their purchases even longer, fueling the need for even more parts from AutoZone and its peers. That's part of the reason why this stock is within grabbing distance of all-time highs this week.
AutoZone is the biggest auto parts retailer in the world, with 5,814 stores spared across the U.S., with smaller exposure to Mexico and Brazil. Historically, AutoZone has focused on DIY consumers, but the firm has been following the lead of peers, boosting its sales efforts to independent shops and other professionals. Today, most AutoZone stores now include commercial centers to cater specifically to that market.
Geographic footprint and SKU availability trump price in the auto parts business, where purchases are fueled by necessity and the ability to get multiple parts in a single stop versus the lowest price. That motivation for parts buyers means that AutoZone enjoys some margin protection against smaller rivals. With rising analyst sentiment in shares of AutoZone this week, we're betting on shares.
Another auto parts stock is making our Rocket Stocks list this week, although it couldn't get much more different than AutoZone. Delphi Automotive (DLPH - Get Report) is one of the biggest auto parts manufacturers and suppliers in the world, providing parts directly to tier-one automakers.
Even though you might not be able to spot a Delphi logo on your car, the firm's deep relationships with manufacturers mean that there's a pretty good chance the company actually had something to do with your vehicle. Delphi's customers include major global manufacturers including General Motors' (GM - Get Report) , Volkswagen (VLKAY) and Toyota (TM - Get Report) .
Delphi has done a good job of diversifying itself. While the firm started off as GM's parts arm, GM only makes up about 15% of sales today. That lower customer concentration not only takes away the risks that GM will go with another vendor, but it also helps to take some of GM's geographic concentrations off of Delphi's income statement. For instance, Delphi now generates a material chunk of sales from automakers who don't sell in the U.S., a potentially attractive business if the dollar reverses its long-term uptrend.
Because Delphi's products are deeply integrated into vehicles' designs, automakers have very high switching costs -- it's rarely cost effective to move to a different supplier for a mission-critical part like a powertrain. That fact gives Delphi bargaining power and an important edge in dealing with its customers. Delphi has been correcting for much of 2016, but new multi-month highs last week are signaling the potential start to a new trend in this car parts giant.