BALTIMORE (Stockpickr) -- All eyes are on earnings season to start Monday, as investors hope that new earnings calls could help buoy stocks this week, just like they hit the brakes on the correction last week.
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So far, the earnings numbers have been overwhelmingly positive. Of the 86 S&P 500 components that have already reported their earnings to Wall Street, three-quarters have reported earnings that beat analysts' expectations. And just as importantly, stock prices are reacting favorably to positive earnings surprises this quarter.
A bullish earnings environment can act like a rising tide that lifts all ships – especially after a sharp selloff. And that's exactly why we're turning to a new 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 270 weeks, our weekly list of five plays has outperformed the S&P 500's record run by 81.59%.
Without further ado, here's a look at this week's Rocket Stocks.
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Boeing
Up first is $89 billion aerospace giant Boeing (BA). Most consumers know Boeing best as one of the biggest manufacturers of commercial airliners, a business that's become increasingly important in the last few years as the firm's long-suffering airline customers suddenly see record levels of profitability. But building airliners is only approximately 60% of Boeing's total business. The balance comes from Boeing's huge status as a defense contractor.
Boeing owns some of the biggest aerospace contracts awarded by Uncle Sam, from replacing the Air Force's KC-46A refueling tanker fleet to retrofitting aging F-16s into unmanned aerial targets for military pilots to dogfight. But it's the commercial airliner business that looks the most attractive here, particularly as U.S. carriers look to upgrade their massive, aging fleets. With the fuel savings attained by next-generation airframes such as the 787 Dreamliner and the 737NG, the decision to sell off older aircraft becomes a whole lot more palatable -- especially in this prolonged low interest rate environment.
Because Boeing's product cycle is extremely long, the firm enjoys a massive backlog. At last count, that backlog weighed in at approximately $440 billion, or nearly five times sales. That abundance of orders in the queue provides a nice sales cushion for Boeing that helps to smooth out any economic speed bumps along the way. Keep an eye out for Boeing's earnings call on Wednesday.
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Morgan Stanley
Morgan Stanley (MS) has the distinction of being one of the few standalone legacy investment banks that made it through the financial crisis of 2008. Now, six years later, this bank holding company looks like a solid way to play the increased M&A deal flow that's been hitting the books in 2014 and beyond.
Morgan Stanley is undergoing big shifts in how it does business. With a low interest rate environment that's lasted longer than nearly anyone could have predicted, the firm is working to drive its fee-based businesses rather than sales sources that are rate-dependent. Growing the wealth management and investment banking businesses, for instance, provide fat margins without the risk that would draw regulators' ire. Owning MS is also basically a call option on rising interest rates. In the event that the Fed does ratchet rates higher, MS suddenly gets exposed to much fatter spreads on its asset-based revenues.
Meanwhile, MS has a much slimmer risk profile today than it did in 2007. And while that means that returns on assets are likely to remain lower forever, that's a change that's long been priced into shares. With a P/E ratio of 13, MS looks relatively cheap in this ripping market.
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Philip Morris International
Now's a good time to think defensive with your portfolio -- and there are few names that look as attractive on that front at Philip Morris International (PM). This $134 billion "sin stock" is the second-largest tobacco company on the planet, with 28% of the global market outside of China and the U.S. PM owns some of the most valuable brands in the cigarette business, including flagship Marlboro and second-tier names such as L&M, Parliament and Chesterfield.
But it doesn't own them here in the U.S. Instead, Altria (MO) spun off its ex-U.S. assets into PM back in 2008, basically driving a wedge between the established (but slowly dying) U.S. market, and the fast-growth tobacco market in the rest of the world. That means that PM offers the rare combination of a huge 4.65% dividend yield, and material growth rates.
It's not all upside at PM, however. Recent dollar strength has been a challenge for the firm, which earns its sales in local currencies but ultimately has to report its numbers here in dollars. With the Fed and other central banks unlikely to take their thumb off the scale for some time, investors should expect dollar strength to persist.
On the whole, PM still looks attractive right now, and the lack of exposure to the U.S. makes it a great low-correlation asset to own if you're concerned about the health of the S&P's rally.
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Paccar
Heavy truck maker Paccar (PCAR) is one of the firms that's been celebrating the recent collapse in oil prices. With truck freight volumes hugely sensitive to the cost of fuel, a drop means more highway miles for the worldwide fleet. And that, in turn, means that truckers are more likely to justify a new rig from Paccar.
Even if you've never heard the Paccar name before, you've no doubt seen the firm's trucks. Paccar owns the Peterbilt, Kenworth and DAF names.
Worldwide, the average age of commercial vehicles has been climbing higher, and so have oil prices (even with the recent drop, crude is still sitting on the high-end of its historic range). Those are both big catalysts for upgrades to PCAR's latest and most fuel-efficient offerings. Fuel cost savings and maintenance savings make the justification for a fleet upgrade much easier to make, and record-low interest rates don't hurt either. (Not surprisingly, those are the exact same catalysts driving fleet upgrade demand for Boeing.)
Financially speaking, Paccar sports a well-capitalized balance sheet with $2.7 billion in cash to help offset the firm's total $8.3 billion debt load. Truck building may be capital-intense, but PCAR's leverage is reasonable right now. Look out for the firm's third quarter earnings call to hit next Tuesday.
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Stericycle
Last up is medical waste management firm Stericycle (SRCL), a name that's getting added attention this month in the context of the Ebola epidemic. Stericycle is the largest medical waste company in the country, providing hospitals, medical offices and pharmaceutical firms with a way to dispose of highly regulated biologically hazardous waste. Not surprisingly, dealing with the consumables no one else wants to touch is a lucrative business, with deep profit margins and a sticky customer base.
The regulatory intensity of the medical waste business provides an attractive moat for Stericycle. Because healthcare facilities are bound by reams of internal rules as well as laws, SRCL's simplified waste disposal offerings take much of that regulatory risk off of its customers' shoulders. The demand for medical waste processors should continue to grow in the years ahead thanks to more healthcare needs from an aging demographic in Western countries.
Stericycle is one of the few companies that's been granted a special permit to transport and treat Ebola-contaminated medical waste. To be clear, the firm's Ebola-related volumes aren't going to have a material impact on its earnings, but it does send an important message to healthcare facilities that if they want to position themselves as capable of dealing with serious health hazards, they need to contract with a Category A infectious disease waste company like SRCL. Earnings later this week could be an important upside catalyst.
-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in the names 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 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
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