After a strong comeback in Friday and Monday’s trading, the Dow Jones Industrial Average lost almost 170 points Tuesday, on concerns that rising oil prices could derail the economic recovery. However, despite unrest in the Middle East and North Africa, I believe the events of this week could set off a market rally that could last well into the summer.
Today, I’ll share all the details on this coming shift, as well as a handful of stock picks — two blue chips and two small caps — that I think are ripe for big moves.
An Economic Boost
Now that investors have taken some profits off the table, the markets look primed to stage their next run higher. All they need is a catalyst, and every day it’s getting more and more likely that we’ll see a key economic figure light up Wall Street. I think that event will come as early as this Friday, when we’ll likely see a very favorable February payroll report.
A number of forces, such as the harsh winter weather, deferred hiring in December and January, and by looking at payroll reports and other recent numbers, that ground could be made up in the upcoming report. This would be a major boost to the market and should get investors in the buying mood — and keep them that way into the summer.
The stocks that will benefit the most in a rising tide market environment are going to be fundamentally sound blue-chip stocks, as well as small caps with recent earnings surprises and higher forward guidance.
So let’s look at four of my top stock picks and how you can get in ahead of their next run higher.
Blue Chips to Buy Now
BorgWarner Inc. (NYSE: BWA) was given a helping hand by the auto industry’s recovery in the fourth quarter. Stronger-than-expected sales of turbochargers and engine-related equipment pushed the company’s sales up 28% in the quarter. Earnings climbed to 89 cents per share, up from 45 cents per share in the fourth quarter of 2009. The analyst estimate was for the company to bring in earnings of 83 cents, so BorgWarner delivered a nice 7% earnings surprise.
BorgWarner is continuing its trend of strong growth. The stock has more than doubled in the past year, and rose 38% in the fourth quarter alone. Looking forward, CEO Tim Manganello set expectations for double-digit revenue growth and up to 40% earnings growth in this calendar year. I really like the company at current valuations and think it’s a prime candidate for profits in 2011.
Citrix Systems Inc. (NASDAQ: CTXS) is another large-cap stock on my Blue Chip Growth buy list that announced a stellar quarter and issued strong guidance. Citrix Systems is a leader in the virtualization software field, and its recent quarter reinforced the fact that the company has a very bright future ahead. The company is making fantastic progress with its online software-as-a-service business, which grew 17% in the year and made up 20% of its revenue.
For the fourth quarter, revenue increased 16% to $530 million, while earnings reached 65 cents per share. The company posted an 8% earnings surprise and 4% sales surprise for the quarter.
More and more large corporations are making the switch to using virtualization software, and this is where much of the company’s growth will come. Management is expecting a record-breaking 2011, raised its full-year guidance and is now expecting earnings of $2.29 – $2.33 a share and revenue of $2.1 billion – $2.14 billion. Pick up shares at current prices if you can. I don’t see any barriers to this company bringing in big profits this year.
Get five more of my favorite blue-chip stocks to buy.
Small Caps to Buy Now
Of the companies with smaller market caps, there are two companies that should get an additional tailwind from the coming market strength.
Polypore International Inc. (NYSE: PPO) is one of my Emerging Growth stocks and reported profits in the fourth quarter that blew away analysts’ estimates. Earnings were $17.7 million, or 38 cents per share, up from last year’s fourth-quarter loss of $131 million, or $2.95 per share. Excluding items, earnings were 42 cents per share, ahead of analysts’ expectations of 34 cents per share by 24%! Sales increased 12% in the quarter to $169.5 million as the company benefited from strong demand in its industry (lithium battery filtration systems).
Investors celebrated the results and sent the stock soaring 14% the day following its release. Shareholders particularly liked comments that from President and CEO Robert B. Toth, who said: “We generated cash, reduced and refinanced our debt, and enhanced our capital structure to provide a solid foundation for sustainable growth over the long term.”
This small company makes polymer-based membranes used to make separators that go into lithium-ion batteries. These are the batteries you find in electronic devices, such as Apple’s (NASDAQ: AAPL) iPad. Lithium applications are on the rise, and PPO is a great way to get exposure to this market.
Acme Packet Inc. (NASDAQ: APKT) is the final company I want to talk about today. For the fourth quarter, the company announced strong earnings, and shares took off in after-hours trading to the tune of 14%. Acme said it booked sales of $70.2 million, up 70% year-over-year. On these sales, the company recorded a profit of $14.5 million, or 21 cents per share, compared with $9.1 million, or 14 cents per share, in the equivalent year-ago period. Excluding items, Acme recorded earnings of 26 cents per share, beating analysts’ estimates of 22 cents per share by 18%.
The communications company also raised its full-year guidance for 2011. The company now expects to rake in sales of $300 million, up from its previous forecast of between $286 million and $287 million. The company also raised earnings expectations to $1.05 per share, up from between 99 cents and $1 per share previously. I don’t see anything getting in the way of this profit rocket stock and think it’s a great addition to any just about any portfolio right now.
