Why Rackspace Hosting, J.C. Penney, and Nordstrom Are Today's 3 Best Stocks

I know this is beginning to sound like a broken record, but it was another mixed day of economic data for investors. Apparently, however, it still proved to be enough to push the broad-based S&P 500 (SNPINDEX: ^GSPC  ) higher and end its two-day losing streak.

Believe it or not, housing data was the primary reason investors were able to push the S&P 500 higher with confidence today, as housing starts surged better than 13% to a seasonally adjusted annual rate of 1,072,000 according to the Commerce Department. This news was followed by an 8% boost in building permits in April to a seasonally adjusted rate of 1,080,000 from 1,000,000 in March. Both figures crushed economists' expectations and could signal that the housing and construction industries are in better shape than some pessimists, including me, have suspected.

In the other column, the preliminary Thomson Reuters/University of Michigan Consumer Sentiment Index for May dipped to a reading of 81.8 versus 84.1 at the end of April. This reading gives economists some general gauge of how optimistic consumers are about their near-term and long-term economic outlooks. This figure dropping a tad, despite the S&P 500's climb to new highs, serves as a warning to investors that consumers' desire to spend may not be as robust as we'd like it to be.

By day's end, though, investors were all about the bounce, and sent the S&P 500 higher by 7.01 points (0.37%), to close at 1,877.86.

However, no company stood taller on the day than cloud-computing services and web-based IT systems provider Rackspace Hosting (NYSE: RAX  ) , which jumped 17.7% after announcing the hiring of Morgan Stanley to help it explore strategic options, which could include a sale of the company. This news comes on the heels of its after-the-close Monday earnings release that featured a 16% year-over-year increase in sales, to $421 million, a nearly 6% rise in adjusted EBITDA to $140 million, and a 22% sequential increase in net income from the fourth quarter. It's possible that Rackspace's revenue during the interim could be choppy as small business and government spending have been anything but predictable during the past year, but the company's ability to rein in unnecessary spending and boost its client portfolio all look like viable reasons why shares may be slightly undervalued here.

Source: J.C. Penney.

Not too far behind Rackpsace Hosting was struggling department store retailer J.C. Penney (NYSE: JCP  ) , which romped 16.3% higher after reporting market-topping first-quarter results and reaffirming its full-year same-store sales growth forecast. For the quarter, revenue rose 6%, to $2.8 billion, on a comparable-store sales increase of 6.2% as its net loss shrunk 27% to an adjusted $1.16 per share. By comparison, Wall Street expected a wider net loss of $1.26 per share. Penney's also projects it'll have better than $2 billion in liquidity by year's end, while growing its same-store sales by the mid-single digits. Obviously, it's good to see Penney's top line growing again, but the company also notes that a good chunk of its gains came from the clearance racks, which only work against its overall margins. Once again, we're seeing Penney's choosing quantity over quality, and that's simply not a pattern that I feel is sustainable during the long term.

Lastly, and sticking within the retail sector, shares of upscale retailer Nordstrom (NYSE: JWN  ) rallied 14.7% after also trouncing Wall Street's estimates in the first quarter.


Source: Wikimedia Commons.

During the quarter Nordstrom produced revenue growth of nearly 7%, to $2.84 billion, as comparable-store sales jumped 3.9% and profit fell ever-so-slightly year over year to $0.72 per share from $0.73, as increased promotional activity weighed on margins despite the company's share buyback efforts. Comparably speaking, the Street was looking for just $2.76 billion in sales and a profit of $0.68 per share, with same-store sales growth of 0%-2%. Looking ahead, Nordstrom left its forecast mostly untouched other than to lower its gross margins slightly due to discounting, while also boosting its expected share purchases. Nordstrom continues to be a well-run company that's resistant to many of the ebbs and flows that cripple lower-price-point retailers. As such, I'd suggest there could be additional long-term upside in shares, although with some hiccups along the way.

Rackspace, Penney's and Nordstrom may have soared today, but all three will likely be no match to keep up with this top stock over the long run
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  • Report this Comment On May 16, 2014, at 7:13 PM, Hansen wrote:

    JC Penney was revered by its customers for its apparel products as well as discount deals and coupons. Soon the business had built a large and loyal customer base. http://bit.ly/1jnf7zw

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