Merrill Lynch Makes Huge Changes by Removing 2 Blue Chips From US 1 List

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With just over a month left in 2016, many of the top companies we follow on Wall Street are making some changes to the lists of their high conviction stock picks for clients. With the market continuing to trade to near all-time highs, it makes sense to examine the lists and make some changes as the rest of the year could have additional volatility. While the political cycle should quiet down with the election over, rising interest rates could prove to be very volatile component.

In a recent research note, the analysts at Merrill Lynch make a big move by removing two blue chips from the firm’s well-respected US 1 list of stocks to buy. The portfolio managers removed a top pharmaceutical company, and a big-time tech stock also comes out. We also review the three top-yielding dividend stocks remaining in the US 1 list.

Eli Lilly

This top pharmaceutical was removed from the US 1 list but remains rated Buy at the firm. Eli Lilly and Co. (NYSE: LLY) is a global health care company with numerous core products in a number of primary-care pharmaceutical markets. The company generates revenues from its pharmaceutical product and animal health segments.

The product portfolio includes Zyprexa (for schizophrenia and bipolar disorder), Gemzar (pancreatic cancer), Evista (osteoporosis), Cymbalta (depression), Cialis (erectile dysfunction), Strattera (attention deficit hyperactivity disorder), Erbitux (cancer) and Alimta (chemotherapy). Eli Lilly also has a strong presence in the diabetes market.

The company posted third-quarter sales and earnings well below Wall Street’s expectations, prompting shares to plummet to a four-month low before rebounding. The stock is down almost 10% on the year and offering investors an outstanding entry point.

Last week the company announced a disappointing Phase 3 trial for the firm’s Alzheimer’s drug solanezumab. The drug missed the primary and secondary endpoints. While the analysts are forced to remove potential earnings from their model due to the failure, they remain positive on the stock based on “Underappreciated growth, driven by the diabetes base business, baricitinib and abemaciclib.”

Shareholders receive a 3.05% dividend. Merrill Lynch lowered its price objective for the stock to $90 from $105, and the Wall Street consensus price target is $97.05. Shares closed Monday at $67.20.

Qualcomm

This top technology stock has done very well this year, but it was removed from the US 1 list. Qualcomm Inc. (NASDAQ: QCOM) is a world leader in 3G, 4G and next-generation wireless technologies. The company includes the licensing business, QTL, and the vast majority of its patent portfolio. Its subsidiary Qualcomm Technologies operates substantially all of Qualcomm’s engineering, research and development functions, as well as substantially all of its products and services businesses, including its semiconductor business, QCT.

Qualcomm reported third-quarter revenue and earnings that beat Wall Street estimates. Fourth-quarter guidance was also better than expected. In China, new semiconductor products are gaining share and management is making better progress with royalty collections.

The analysts are bullish on the company’s acquisition of NXP Semiconductors, which Qualcomm is buying in an all-cash deal at $110 per share. The deal is expected to close at the end of 2017 and should be immediately accretive to earnings. The merger brings together complementary products for mobile, automotive, Internet of Things and networking applications.

While no specific reason for the change was cited, we get the sense that the removal from the list is a valuation move, as well as the fact that arbitrage accounts could keep pressure on the stock until the NXP deal is completed. The stock remains rated Buy.

Qualcomm shareholders receive a 3.16% dividend. Merrill Lynch has a $76 price target. The consensus target is $73.62. The shares closed Monday at $67.10.