With the market hitting new highs and earnings right around the corner, it is truly a toss-up on which way the market goes after such a strong and lengthy rally. By most measures stocks are fully priced on 2014 earnings. With that in mind, it may be time for investors to shift some of their portfolio money allocated to growth to names that present more of a value stock proposition.
A new research report from Merrill Lynch highlights a list of their top ten value stocks to buy. While there are no changes in the list for the month of July, these top stocks may be good replacements for growth names that have outperformed over the past year or so. All of the stocks are rated Buy at Merrill Lynch.
Clearly these are deep-value and contrarian shots the Merrill Lynch team is taking on sectors that underperformed over the past year, especially financials and the deepwater drillers. That said, adding a few names from this list to take the place of growth or momentum names in a diversified portfolio really makes sense with the market trading right at all-time highs.
Citigroup Inc. (NYSE: C) has been a poor performer this year for investors and portfolio managers, down more than 10% year to date. The bank trades a very reasonable 11.2 times trailing earnings and is down 16.3% from highs printed last year. With loan activity and other banking services starting to ramp up as the economy improves over the second half, adding this quality large cap bank to a portfolio at an incredibly low price now makes good sense.
Investors are paid a tiny 0.1% dividend. The Merrill Lynch price target for the stock, which is also on their US 1 list, is $65. The Thomson/First Call consensus price target is $58.21. Citigroup closed Monday at $47.98 a share.
Capital One Financial Corp. (NYSE: COF) is another top financial to make the list. The company has continued running its string of quirky commercials to grow its credit card business, and it trades at a low 11.1 times earnings. Capital One also offers a broad spectrum of financial products and services to consumers, small businesses and commercial clients through a variety of channels.
Capital One has more than 900 branches around the United States and more than $206.9 billion in assets. Investors are paid a 1.4% dividend. The Merrill Lynch price target is $84, and the consensus target is at $84.67. The stock closed Monday at $83.57.
Ensco PLC (NYSE: ESV) is one of the out-of-favor deepwater drillers and a solid energy name to make the list. Last year the company took delivery of ENSCO 121, the second of four ultra-premium harsh environment jackup rigs in its ENSCO 120 Series. ENSCO 121 is an enhanced version of Keppel’s proprietary KFELS Super A Class design. The rig has been contracted in the North Sea at a day rate of approximately $230,000.
Ensco shareholders are paid an outstanding 5.4% dividend. Merrill Lynch has a $64 target price, while the consensus target is $53.25. Ensco closed Monday at $53.80.