M&A activity is back in the spotlight this week. Already a handful of high-profile acquisition announcements are getting positive feedback from investors, as they bid up shares of both the acquirers and buyout targets. That behavior is pretty telling about market sentiment right now: as investors feel increasingly positive about stocks, they're much more likely to bid up buying firms before they know the full implications of the deals.
Instead, they're issuing a vote of confidence that management will do the right thing to increase shareholder value.
As a result, we could see a surge in stock valuations this week as Wall Street gets its legs back. Last week provided us with a push above a significant market resistance level, with major bullish moves on Monday and Friday. This week, we'll attempt to capitalize on any upside action with a new set of "Rocket Stocks" plays.
We're turning to stocks with rising analyst expectations to eke maximum sentiment out of the markets. I identify those stocks by running a quantitative screen that picks out companies with a recent series of analyst upgrades and a history of outperforming the Street's expectations.
It's a methodology that's worked well for us in the past: Our list outperformed the S&P 500 by 83 basis points last week.
That brings our total dominance over the market to 66.59% over the past 62 weeks that we've been keeping track of our Rocket Stocks' performance. This week, we'll attempt to continue our trend with 3 new stocks.
Shareholders of Eaton are having a good year in 2010, with shares of the Cleveland-based power management firm up nearly 30% in the last nine months. Coupled with a generous dividend payout, the company is actually up almost 3% more since the beginning of the year. Strong fundamental performance at Eaton should keep that performance up for the rest of the year.
Part of that success has been earned by exploiting growth opportunities overseas, in places such as China, where the company's products are used in everything from automobiles to the plants that build them. Another source of growth has been fueled by R&D development. By cranking out new, in-demand technologies, Eaton is able to get its foot in the door to nascent markets.
While industrial manufacturers have had margins squeezed at the hands of lower sales volumes in the last couple of years, Eaton has actually managed to expand the chunk of sales that flows through to the profit line on the income statement. That's been accomplished in large part by cutting excess costs and lowering acquisition expenses thanks to a large installed base. Those factors should continue to reap dividends for the foreseeable future.
Nike has been an interesting stock to watch lately. Despite market saturation and absurd competition in both the North American and European markets, the company continues to make money hand over fist thanks to innovative designers and one of the most popular brands in the world. In the next few years, an increased focus on emerging markets could be the key to sustained growth.
Nike benefits from a premium brand image, a major factor in the company's ability to demand top dollar for its products. As a result, the company's gross margins are enviable, and its balance sheet is excellent.
Because of Nike's sheer size, it is typically the biggest single supplier for its retailer customers; that means that the company holds the majority of the pricing power in its relationships. It also means that retail outlets will continue to focus energy on selling big-ticket Nike items.
While the company's 27 cent dividend is welcomed by Wall Street, the payout is far from game-changing for Nike's shareholders. That said, continual dividend increases and billions of dollars earmarked for share buybacks do have a palpable impact on shareholder value over time.
With eyes to emerging market countries and a history of doing right by shareholders, Nike should continue to be a favorite among investors (including Warren Buffett) in 2010.
That hasn't always been the case with MetroPCS Communications , a mid-cap cellular carrier that provides service to more than 7.6 million subscribers in the U.S. Operating in a highly competitive, capital-intense industry has kept potential investors away from shares of the company.
But there are more than a few positives for this small wireless stock.
First up is growth. With a customer base that only rings in at 5% of the company's wireless capacity, there's plenty of room for expansion if MetroPCS can lure investors to its camp.
So far, the company has done a good job of doing just that: Revenue growth sits well in the double-digits for the past few years. That said, as wireless service penetrates to nearly all Americans, MetroPCS will need to steal customers from big competitors like Verizon , AT&T and Sprint to maintain its growth in the future.
At present, the company does that by competing solely on cost, but as cellular services become increasingly commoditized, MetroPCS will have trouble matching legacy carriers' margins.
Right now, MetroPCS could make an attractive acquisition target for a carrier looking to add millions of subscribers to its little black book and put MetroPCS' advanced infrastructure on its balance sheet. Increased press coverage could raise the company's profile enough for bullish pressure in the short term.
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