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5 Rocket Stocks to Buy for Dow 15,000

Jonas Elmerraji | TheStreet.com Contributor
Monday, 6 May 2013 | 1:23 PM ET
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Last week was a big one for stocks. It brought a new high water mark out in the Dow Jones Industrial Average and the S&P 500, pushing the latter through an important round-number level at 1,600.

As I write this morning, the Dow is hanging just a handful of points shy of its corresponding 15,000 level after printing above it a few times on Friday.

Strange as it may seem at first, those big round-number levels in the big indices make for more than just catchy headlines; they're important price levels because of the psychological factors that impact investors. So, when investors are willing to buy stocks in mass above a level like S&P 1,600, it bodes well for the strength of the market. It means that buying is still convicted as the market makes much more conspicuous higher highs.

That bodes well for Mr. Market's upside potential as we round the corner to summer. To take full advantage, we're turning to a new set of "Rocket Stock" names.

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 198 weeks, our weekly list of five plays has outperformed the S&P 500 by 75.4 percent.

Without further ado, here's a look at this week's Rocket Stocks.

Coca-Cola

First up is Coca-Cola. Coke is the biggest non-alcoholic beverage company in the world, selling around 3 percent of all of the beverages served globally every single day. That's enormous scale any way you slice it. As things start heating up this summer, so too should Coke's sales numbers. The firms brands include the obvious marques—such as Coke and Diet Coke—as well as less obvious names such as Sprite, Dasani and Poweraid.

Coke's network is one of its biggest assets. The firm has distribution in more than 200 countries, giving the firm efficient reach that's nearly impossible to replicate. And it shows: Coke earns 70 percent of its sales outside of the U.S., diversification that few blue-chips can even boast. As the firm continues courting consumers in emerging markets, it should be able to materially grow its sales over the next several years—no small feat for a firm that moved $48 billion worth of drinks in 2012.

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There's no question that Coke is a defensive name; the firm's product is recession-resistant, it pays a 2.65 percent dividend yield, and it sports a solid balance sheet. But with quality leading in performance in 2013, that's panned out to stellar 16.5 percent performance year-to-date. Investors can expect that performance to keep rolling.

(Read More: Coca-Cola Beats Estimates, Boosted by Emerging Market Sales)

Altria

Altria is dying, but that shouldn't stop you from buying it. The $73 billion company is one of the biggest tobacco names in the world, with brands such as Marlboro under its belt. The problem is that Altria only represents the U.S. business of legacy tobacco giant Philip Morris (Philip Morris International is the non-U.S. side of the business). With tobacco sales slowly declining here at home, selling cigarettes isn't exactly a growth opportunity.

But the key word there is that the declines are slow, and as long as that remains the case, Altria will remain a cash cow that throws off a huge dividend payout—a 4.82 percent yield right now. In the meantime, Altria has been expanding its portfolio in the "sin stock" world, expanding its exposure to alcohol with a 27 percent stake in SABMiller and a wholly owned winemaker in Ste. Michelle Wine Estates. That's a big departure from the firm's former ownership of Kraft Foods, but it's one that makes a whole lot more sense in my view.

Regulations continue to put a very tight leash on cigarette makers' marketing efforts, and on new product offerings. But all of those challenges are already priced into shares. Customer stickiness is extremely high in the tobacco business, and that helps offset some of the marketing hurdles that Altria's faced with. As the firm continues to diversify outside of tobacco, it should stay relevant to investors. Until then, its dividend makes it worth buying for income.

Union Pacific

2013 has been a strong year for shares of Union Pacific. Shares of the $70 billion railroad stock have rallied almost 19 percent this year, buoyed by overall strength in the transports sector. Union Pacific is the largest railroad on the continent, with more than 32,000 miles of track that links 23 states, Canada and Mexico. That scale puts the firm in a strong position to grab more freight volume as the economy warms up.

While oil prices have dipped recently, they're still on the high end of their historic range, and that actually bodes well for railroads. In general, rail shipping costs around one-fourth as much as trucking does per ton shipped, a cost advantage that typically sends customers setting aside the convenience factor of truck freight once fuel prices get past a certain point. The firm's hefty commodity exposure is a little less attractive right now, but that hasn't stopped Union Pacific from posting impressive revenue numbers lately.

Union Pacific has a deep economic moat. Railroad assets aren't easily copied by rivals—and they're extremely costly to maintain. While that does mean that Union Pacific has some hefty fixed costs to overcome, its scale easily makes up for that drawback. With much better efficiency than the firm had just a couple of years ago, Union Pacific looks well positioned for 2013. We're betting on shares of this Rocket Stock this week.

Costco Wholesale

Investors should love Costco Wholesale in 2013—and not just when they're trying to buy ketchup by the gallon. Costco isn't the biggest club warehouse in terms of locations, but it is the best. Costco's 430 locations boast much higher revenues per square foot than competitors like BJ's or Sam's Club (around twice as much, in fact) thanks to a niche of selling bargain-priced big-ticket items. That niche also keeps Costco's customer mix skewed towards "mass affluent" consumers.

(Read More: Cold Snap Taking Bite Out of Retail Sales)

Costco operates a membership model, which means that only the firm's 64 million members can shop in its stores. That membership restriction provides Costco with a recurring revenue stream, and (more significantly), a very loyal and sticky customer base. Because consumers are less likely to carry memberships from competing wholesale clubs, Costco's existing base of higher-spending customers gives the firm a shallow economic moat vs. its peers.

Because Costco earns the majority of its profits from those membership fees, it's able to charge very low prices for its merchandise. Financially, Costco is in stellar shape. The firm carries close to a billion dollars in net cash, a hefty amount of dry powder for a retailer. As consumers keep spending in 2013, Costco should keep rallying.

TJX

TJX is another name that's had a strong retail rally in 2013. Shares of the $35 billion off-price retailer have climbed close to 17 percent so far in 2013. TJX owns an attractive collection of discount retail names that includes T.J. Maxx, Marshall's and HomeGoods—three store chains that benefit when consumers want to seek out a bargain.

TJX is the standard bearer in the off-price retail segment, the firm's stores stock major brand name clothing, accessories and housewares at prices that are fairly dramatic discounts to their retail costs. Better, full-price retailers and manufacturers need TJX because the firm is willing to buy massive swaths of excess inventory.

The firm's suppliers can hypothetically bypass the middle-man by opting to sell last season's fashions at their own outlet stores, for most it's not a feasible model. Retail is extremely capital intense, and TJX provides a top-line boost to its suppliers with zero risk. Those factors should keep quality inventory flowing to TJX's stores for the foreseeable future. We're betting on shares of this Rocket Stock this week ahead of May 21's earnings call.

By TheStreet.com Contributor Jonas Elmerraji

Additional News: More Retail Investors Own Apple Than Ever: TD

Additional Views: Buffett: Right Now, Stocks Are Good, Bonds Are Bad

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Disclosures:

At the time of publication, Jonas Elmerraji had no positions in stocks mentioned.

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Disclaimer

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