Five Hot Summertime Stocks
Never mind global warming: The action in the stock market this spring may be enough to melt the ice caps. Investors encouraged by strong earnings and a dizzying parade of acquisitions have driven the markets higher in tandem with the thermometer. With the Dow Jones Industrial Average shooting past the 13,000 mark, setting new record highs, and other indexes near their best levels in many years, many investors will likely follow the old adage to sell in May and walk away as summer beckons (see BusinessWeek.com, 5/2/07, "A Smarter Seasonal Stock Strategy").
But before you decide to take a vacation from stocks, we would like to call your attention to some names that could thrive as the weather gets balmier, the clothing gets skimpier, and the lawnmowers roar. To wit: While many people are on vacation, these companies are hard at work catering to their customers' summertime needs for refreshment, recreation, and relocation.
Here's Five for the Money's roster of stocks that could sizzle this summer:
1. Pool Corp.
What could be more of a pure-play summer stock than Pool Corporation (POOL)? It's the world's largest wholesale distributor of swimming pool equipment and accessories. The company has shown impressive growth in 2006 revenues were $1.9 billion up 23% from 2005 and net income climbed 18%, to $95 million, in the same period. Competing against small, local players, Pool is well positioned in its highly fragmented space, says Piper Jaffray (PJC) analyst Michael Cox.
Nonetheless, he has a market perform rating on the stock. Cox is concerned that current real estate and credit conditions may make consumers too worried about deflating home prices to shell out for luxuries like in-ground pools. But,with plenty of room for more pools to appear even in Sunbelt states where the company does most of its business, he's bullish for the industry as a whole. (Piper makes a market in Pool.)
Jarden (JAH) is a highly acquisitive outfit with a large stable of well-known brands. Though they may not have heard of the company itself, summer vacationers use Jarden products often. They deal Bicycle playing cards in departure lounges and set up Coleman camping supplies in forest clearings. Indoor types will recognize labels like Mr. Coffee and Oster.
In other words, the company's products are quietly ubiquitous. But it's not a one-season outfit. In April, Jarden said it would acquire K2 (KTO) for $1.2 billion, which will broaden its portfolio to include sports supplies for all seasons. The K2 deal will include the company's eponymous skis—as well as warm-weather staples like baseball gloves and in-line skates.
Analysts were generally positive on the deal. A recent report from equity research outfit Sidoti raised the price target on Jarden $4, to $58, saying the company has repeatedly been able to improve the performance of "mature brands." It suggests that the deal, which Jarden hopes to close in the third quarter, will immediately add to the Rye (N.Y.) company's earnings.
3. Southwest Airlines
Southwest (LUV) may no longer be Wall Street's only airline darling now that stocks in legacy carriers like American Airlines (AMR) and Continental Airlines (CAL) have shown some life. Still the pride of Dallas Love Field airport still serves up plenty for analysts to admire. When oil prices drive up the cost of flying, as they seem to do every summer, Southwest can benefit because its typically lower fuel and other operating costs allow it to charge cheaper ticket prices.
In a notoriously inconsistent sector, Southwest is quite reliable, having turned a profit in 64 consecutive quarters, a streak extending far beyond the post-September 11 industry devastation. A recent Standard & Poor's report says that with an average oil hedge for all of 2007 at $50 per barrel, Southwest is better equipped "than any other U.S. airline." Still that's a big jump from 2006 when it had most of its oil hedged at $38 per barrel.
While S&P downgraded the shares of other airline operators May 2 on concerns about rising fuel prices, it left its opinion on this low-cost carrier at buy. Trading at a 52-week low May 2, the shares could present an opportunity for patient investors (S&P is owned by BusinessWeek.com parent company McGraw-Hill (MHP)).
The cola wars gets fizzy in summer, and this year PepsiCo (PEP) could be a strong play over rival soft-drink giant Coca-Cola (KO). While the company is still best known for its cola, that's not a promising market these days. The soft-drink giants face challenges to their flagship products, especially domestically, where health concerns have probably never been more pronounced among the American public.
But Pepsi has a wide array of offerings besides cola—snack staples like Doritos and Lays and healthier offerings like Quaker Soy Crisps. S&P likes the company because it is "trend-setting for the industry " in its dedication to developing products for the health-conscious." Among Pepsi's recent moves: Its effort to reduce trans fats in Frito-Lay snack foods.
Pepsi's growth in this direction includes brands such as the Mother's Natural Foods line of breakfast cereals marketed by the company's Quaker—as in oats—subsidiary. It also includes noncarbonated drinks put out by the Tropicana unit and the flagship Pepsi brand.
On May 2 Pepsi snapped open some good news for investors in the form of a higher dividend and news that it will buy back $8 billion in stock in addition to a buyback currently underway.
5. Home Depot
Home Depot (HD) is the second largest U.S. retailer selling everything from flooring to roofing nailers, but massive barbecue grills remain one of the signature displays at the chain's stores. Following the second quarter of 2006, the company said it had a 17.9% market share in grills. Of late it has prioritized growth in that area and other outdoor recreation products like patio lighting.
Of course the do-it-yourself giant doesn't impress Wall Street with barbecue alone. Morningstar (MORN) rates Home Depot four stars out of five, believing it will benefit from its strong retail position and the departure of Chief Executive Robert Nardelli, who was ousted in January. As with Pool Corp., the housing market is a concern, but the research outfit was encouraged by the company's renewed focus on its core retail business and supplying services to aging boomers who will want more of their purchases installed for them while they enjoy the summer air.