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Jubak: 5 stocks the market's set to love
Investors can get a sense of the sectors that have potential for the next few months by looking at those that are percolating higher.
By Jim Jubak
We know what stocks the market loves now. Just look at a list of new highs for any day last week. Its dominated by energy stocks, such as Anadarko Petroleum (APC, news, msgs) and Apache (APA, news, msgs). Timber and paper companies such as Boise Cascade (BCC, news, msgs). Food producers such as ConAgra (CAG, news, msgs) and Tyson Foods (TSN, news, msgs). Safe consumer blue chips such as Gillette (G, news, msgs) and Kellogg (K, news, msgs).
And we know what it hates now. Technology. Intel (INTC, news, msgs) was down 6% from April 6 through April 16. Cisco Systems (CSCO, news, msgs) fell 9%. PMC-Sierra (PMCS, news, msgs) tumbled 13%. And financials. For the same period Citigroup (C, news, msgs) was down 4%, Charles Schwab (SCH, news, msgs) fell 4% and Wachovia (WB, news, msgs) dropped 4%.
But how about next month and the month after that? What will the stock market love and hate then?
The hate part is pretty easy. Its likely that the fear of higher inflation and the uncertainty about what the Federal Reserve will say about interest rates at its May 4 meeting and do about interest rates at its June 30 meeting will keep the pressure on technology and financial stocks. The odds are that those sectors that are weak now will stay weak through June.
The love part is harder. But investors can get a sense of the sectors that have potential for the next few months by looking at sectors percolating higher just behind the energy, commodities, food, and consumer stocks that have become so pricy recently.
The beneficiaries
The retail sector is the beneficiary of recent strong sales numbers. Consumer durables (goods that last three years or more) and consumer non-durables are the beneficiaries of continued consumer spending. Manufacturing goods and services are the beneficiary of a pickup in capital goods spending and a general improvement in CEO confidence.
To turn those strong sectors into strong stocks, I went looking for shares showing strong price momentum, positive earnings revisions from analysts and an acceleration (or possible acceleration) in earnings growth.
Chico's (CHS, news, msgs). Its a measure of this remarkable growth machine that the fiscal first quarter was a major disappointment at Chicos. The company delivered year-to-year growth of just 17%. The companys second worst performance in the last eight quarters? The 46% earnings growth of the second quarter in fiscal 2003. This kind of growth record will come to a stop some day, but the evidence says, not yet.
The companys new White House and Soma store lines are one source of new sales, but Chicos still has plenty of tricks left to keep sales per square foot in existing stores growing, too. The recent addition of outerwear and suits has the potential to drive the companys average price point to $71 from the current $60 over the next five years. The stock is expensive at almost 40 times trailing 12-month earnings. But for investors looking to buy into building retail momentum, Chicos remains a top choice. The companys net profit margin of 13% is almost three times the industry average of 5%.
Breakout periods
Pep Boys (PBY, news, msgs). It'll use the proceeds from an offering of 4.3 million shares it completed on March 19 to pay down debt and to accelerate the pace of its store-remodeling program. Add those two structural improvements to the upswing in sales of tires, tools and automotive products in general that seems to be developing, and the April and July quarters could be breakout periods for Pep Boys.
You can see the sales trend in the tire numbers: Fiscal fourth-quarter tire sales were a solid 5% above the comparable period last year. The company is looking for 5% to 7% growth in the fiscal first quarter, which ends on April 30. Oh, and I havent even mentioned that the companys efforts to source more products in Asia is likely to raise operating margins this year.
MST Systems (MTSC, news, msgs). As a supplier of testing products used to help manufacturers speed up and improve the design, development and manufacturing of their products -- and as a maker of industrial sensors -- MST Systems is well placed to benefit from any pickup in manufacturing activity in the short term. For example, the company projected in December that sales in the testing segment, down 2% in 2003, would recover this year.
In the long-run, MST Systems is likely to benefit from the trend toward outsourcing and off-shoring since as companies send out more and more of their work, the need to pre-test and fine tune designs and processes increases. Only one analyst follows the company, so take this Wall Street consensus with a grain of salt: The forecast is for earnings per share to grow 18% in the year that ends in September.
Heavy trucks
Oshkosh Trucks (OSK, news, msgs). I added Oshkosh Trucks to Jubaks Picks on Jan. 29 for its exposure to the military and security markets. The company is a major supplier of heavy trucks to the U.S. forces in Iraq and of fire and rescue vehicles to state and municipal emergency services agencies. But Oshkosh has other businesses as well that look likely to pick up with increases in economic activity and the pickup in business spending. For example, the company has forecast 9% growth this year in its sales of concrete mixes.
Orders, however, are running ahead of that pace. And the companys airport segment is picking up along with air-traffic volume. About 15% of its sales are from rescue and snow-removal equipment for airports. The stock trades at 20.5 times trailing 12-month earnings per share and 18.3 times projected 2004 earnings.
Rogers (ROG, news, msgs). Want to get exposure to the surging sales of consumer electronics products from wireless phones to cable TV set-top boxes to laptops? Then Rogers is your stock.
The company specializes in the polymers and foams that form the backbone of printed circuit boards, chip packages and keyboards. And thanks to its position as a supplier to multiple players in an industry, by buying Rogers youre betting on continued growth in consumer electronics without having to pick winners and losers. Among its customers are Nokia (NOK, news, msgs), Motorola (MOT, news, msgs), Ericsson (ERICY, news, msgs) and Siemens (SI, news, msgs). Analysts see earnings per share growing by 61% in 2004, and the stock trades at a price-to-earnings ratio of just 21.4 on those projected earnings.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Oshkosh Trucks. He does not own short positions in any stock mentioned in this column.
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