These Firecracker Stocks Could Still Be Climbing
Even after achieving solid returns in the second quarter, these stocks still look cheap.
Our Picks
There weren't a lot of fireworks in the stock market in the second quarter. Sure there were periods of softness here or stretches of strength there, but after all was said and done the market basically ended up where it started.
But of course not every stock or every sector posted lackluster returns in the quarter. Health-care stocks had a great run during the quarter, and consumer stocks provided some nice returns, as well. We at Morningstar generally have a pretty simple stock-investing philosophy: Buy great companies at cheap pieces and hold on to them for a long time. So generally speaking, we see pauses in the stock market as a good opportunity to make some long-term investments.
So does that mean that investors should forgo investing in these sectors and exclusively look at laggards such as energy? Absolutely not. Sometimes stocks that have had a good run are just on the start of a hot streak. If, even after the runup, the stock still looks cheap on an absolute basis, it might still be a good entry point. The stock might not be as cheap as it once was, but it might still provide respectable returns over time.
We used our Premium Stock Screener to look for stocks that had gained more than 10% during the last three months but that our analysts still thought were cheap (that is, they had Morningstar Ratings for stocks of either 4 or 5). You can run the screen for yourself here. Below are four names that passed the screen.
Nissan Motor (NSANY)
From the Premium Analyst Report:
The Nissan-Renault alliance is a partnership rather than an acquisition, and both companies leverage their combined size to obtain scale in purchasing and to share technology and vehicle platforms. Carlos Ghosn leads both firms. This single-CEO structure has worked well because it has ensured consistency in implementing a well-orchestrated, combined strategy. The launch of several all-electric vehicles by both Nissan and Renault demonstrates the alliance's ability to jointly develop and bring to market a significant, game-changing product while taking advantage of scale to reduce investment in the project.
Sonic
From the Premium Analyst Report:
Although near-term results will likely be tempered by unemployment and industry discounting, we remain optimistic about Sonic's ability to expand margins over a longer horizon. With a unique drive-in format, carhop delivery service, and distinctive menu offerings, we believe Sonic has distinguished itself from rivals and is positioned to evolve into a national quick-service restaurant chain. That said, we do not believe the firm has the scale or brand awareness needed for an economic moat in the intensely competitive quick-service restaurant category, especially when compared with large multinational rivals.
Seagate Technology (STX)
From the Premium Analyst Report:
Secular trends toward increasing storage requirements--the creation, sharing, and aggregation of digital content, data backup requirements, and the increasing use of storage in consumer electronic devices--have been a boon for hard disk drive makers in recent years. Industry shipments have increased by double-digit rates in each of the last eight years except 2009. Given that these secular trends are far from played out, we expect brisk increases to continue for storage and therefore hard drives.
Baxter International (BAX)
From the Premium Analyst Report:
Baxter International's prowess in injectable therapies makes the firm an indispensable supplier to caregivers around the globe. Although the firm faces significant challenges especially in the short term, Baxter has set its sights on expanding through internal development and small acquisitions, and we like its prospects.
Data as of June 30, 2011.