Please ensure Javascript is enabled for purposes of website accessibility

Why United Continental, TRW Automotive, and SouFun Holdings Are Today's 3 Best Stocks

By Sean Williams - Jul 10, 2014 at 5:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Japan acts as a cement block for the U.S. stock market as United Continental, TRW Automotive, and SouFun Holdings all shoot significantly higher.

It was another day of generally positive economic data for U.S. investors, but today was largely overshadowed by a negative report out of Japan.

On the home front, weekly initial jobless claims fell to a better-than-expected seasonally adjusted rate of 304,000, according to the Bureau of Labor Statistics. By comparison, economists had been forecasting weekly initial jobless claims would come in at a seasonally adjusted rate of 315,000. Without question, the jobs markets is showing significant signs of improvement, and any jobless claims figure hovering around 300,000 would likely be conducive to a steady or falling U.S. unemployment rate.

In addition, the Commerce Department noted that U.S. wholesale inventories for May rose by 0.5%. Although this was a smidgen below the 0.6% consensus estimate on Wall Street, it still signifies that businesses are ramping up their inventory in preparation for stronger sales in the second half of the year.

However, it was practically impossible for the broad-based S&P 500 (^GSPC 1.73%) to escape the dismal May machinery orders that came out of Japan earlier today. While economists were projecting a rise of 0.7% in machinery orders, Japan reported that orders actually tumbled 19.5%! Machinery spending is closely watched as it's a strong determinant of capital spending in Japan, and could signal whether or not Japan will continue to recover. Of particular concern is the fact that that this drop came just a month after sales tax increases took effect in Japan.

With worries that one of the globe's largest economies may be losing its footing, the S&P 500 shed 8.15 points (-0.41%) to close at 1,964.68. Considering that the index was down 20 points earlier this morning, this should be considered a small victory for optimistic investors.

Despite the decisively "red" day, major airline United Continental Holdings (UAL 1.73%) soared 12.7% after reporting its June operational data, and updating its second-quarter forecast. For June, consolidated traffic was basically flat year over year, while consolidated capacity increased by 0.8% from the year-ago period. United Continental noted a 0.3% decline in domestic revenue passenger miles (RPM) in June, while international RPM rose 0.7%.

Source: United Continental Holdings.

The real reason United soared was its forecast that its passenger revenue per available seat mile (PRASM), an important measure of airline margins, will rise by 3.5% in the second quarter. Previously, United had forecast PRASM growth of just 1% to 3%. While investors certainly deserve their day in the sun, I'm leery of United's long-term potential given the cyclicality of the airline business model, and the high capital expenses associated with relatively small margins.

Following behind United Continental is auto safety parts manufacturer TRW Automotive (NYSE: TRW), which surged 8.2% after confirming that it had received an unsolicited, non-binding takeover offer from an unnamed suitor. Although TRW chose to keep its potential purchaser a secret, the New York Times opined that it could be German auto parts company ZF Friedrichshafen. TRW announced that its board is analyzing the offer, as well as other strategic alternatives.

Source: TRW Automotive. 

I'm never a fan of chasing a stock higher on buyout speculation, but the long-term prospects of TRW Automotive are strong enough to support further upside if it remains independent. There's literally a world of parts-supplying potential in China, India, and a number of other rapidly growing emerging markets that should fuel TRW's bottom line for years to come. At less than 12 times forward earnings, this is still an attractive business.

Source: Images Money, Flickr.

Lastly, real estate Internet portal SouFun Holdings (SFUN) advanced 6% after announcing that it had entered into cooperation agreements with two of China's four-largest new home agency companies. According to SouFun, its agreement with Shenzhen World Union Properties -- China's No. 1 new home agency -- could result in approximately $120 million in aggregate cash considerations, while its strategic cooperation with Hopefluent -- China's No. 4 -- could yield up to $91 million in cash considerations.

On one hand, there's little denying that China's growth prospects trounce pretty much any other larger nation around the world. This would imply that home-growth potential in China should remain strong as more citizens are entering the middle-class ranks. Conversely, distrust of Chinese financials still remains heightened, meaning SouFun isn't going to trade at a particularly high premium to its peers despite its strong growth prospects. I would suggest that shares are probably fairly valued where they are right now.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$4,280.15 (1.73%) $72.88
Fang Holdings Limited Stock Quote
Fang Holdings Limited
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
$39.34 (1.73%) $0.67

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/14/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.