The Federal Reserve is sounding hawkish, and while it probably don’t raise rates again until December, the path is clear: rates are going higher. Stocks are feeling very overbought, and the big tech sell-off reminded investors just how fast the big funds that run on algorithms can jump out. The tough question for investors, many of whom feel a big sell-off could be coming, is what to do now.
In a new research report, Merrill Lynch’s outstanding equity and quantitative strategist, Savita Subramanian, makes the case that while stocks have been boosted by strong data, which may be ready to slow, it is very possible that upcoming macro headlines may not be so rosy. She said this in the report:
As tax reform takes center stage, stimulus-fueled optimism could wane as friction around funding the tax bill rears its head. But sitting it out is riskier. The last year of a bull market’s median return is 20%, and the Great Rotation hasn’t happened yet.
With that in mind, we screened the Merrill Lynch research universe for stocks that are rated Buy, pay a solid dividend and are not trading at sky-high multiples. We found four that make sense now.
This one of the top railroad stocks and is a top idea for investors looking to the transports. CSX Corp. (NYSE: CSX) provides rail freight transportation over a network of approximately 21,000 route miles and 36 terminals (and 57 intermodal terminals) across the eastern half of the United States. It controls 4,071 locomotives and 216,000 rail cars on its network (over half are not owned or leased by CSX at any given point), and it has nearly 30,000 employees.
Hunter Harrison, the new CEO of CSX, recently bought a 300,000-share block of the company’s stock at a reported share price of $50.20. The posted total for the buy was a sizable $15 million. The top man making a big purchase like that is about as bullish a statement for the company and shareholders that can be made.
CSX shareholders receive a 1.5% dividend. The Merrill Lynch price objective was recently raised to $65 from $56, and the Wall Street consensus target price is $57.16. The shares closed most recently at $53.29 apiece.
This company remains a top Wall Street energy pick. Exxon Mobil Corp. (NYSE: XOM) explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa, Asia, Australia and Oceania. It also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and specialty products, and it transports and sells crude oil, natural gas, and petroleum products.
Top Wall Street analysts are very positive on the long term as the overall corporate strength of this massive integrated giant plays a significant part in the company’s usually solid earnings reporting pattern.
The company posted solid first-quarter results, and the Merrill Lynch team recently raised the stock back to a Buy rating, as the analyst feels it is an outstanding place for investors to put money, and Exxon is the firm’s top major idea now. The analysts also cite the ability of the firm to maintain and cover the cash dividend with lower oil prices as a key positive.
Exxon shareholders are paid a 3.75% dividend. Merrill Lynch has a $100 price target on the stock, and the posted consensus target is $87.04. The stock closed Thursday at $82.26 a share.
Many on Wall Street feel this company deserves a premium multiple to its peers, and it is also on the Merrill Lynch US 1 list. Lowe’s Companies Inc. (NYSE: LOW) operates as a home improvement retailer, offering products for maintenance, repair, remodeling and home decorating.
Categories include kitchens and appliances; lumber and building materials; tools and hardware; fashion fixtures; rough plumbing and electrical; lawn and garden; seasonal living; paint; home fashions; storage and cleaning; flooring; millwork; and outdoor power equipment. The company also offers installation services through independent contractors in various product categories.
The stock is trading at a price-to-earnings discount to its rival Home Depot, as well as trading below its five-year and 10-year P/E averages. With earnings expected to grow at an 18% compounded annual growth rate through 2018, adding shares at current levels makes sense. Plus the analysts feel the dreadful storms and flooding in the west, especially California, could boost first- and second-quarter 2017 numbers.
Lowe’s investors are paid a 2.05% dividend. The $100 Merrill Lynch price objective compares with the consensus target of $88.85. The share price was $80.39 on Thursday’s close.
A top telecommunications pick at Merrill Lynch for 2017, Verizon Communications Inc. (NYSE: VZ) is a global leader in delivering the digital world. Verizon Wireless operates America’s self-described most reliable wireless network, with 109.5 million retail connections nationwide. Verizon also provides converged communications, information and entertainment services over America’s most advanced fiber-optic network, and it delivers integrated business solutions to customers worldwide.
The company recently completed the $4.48 billion purchase of Yahoo in an attempt to increase content delivery and internet exposure. The assets acquired from Yahoo will be combined with AOL brands under a new subsidiary called Oath, which ultimately will house more than 50 media and technology brands. The new company will be headed by former AOL CEO Tim Armstrong, and many on Wall Street are positive on the deal.
Verizon investors are paid an outstanding 4.95% dividend. The Merrill Lynch price target is $59. The consensus target is $50.05, and the stock closed most recently at $46.64.
These four top ideas to buy are not trading at all-time highs, but they pay good dividends and are rated Buy at Merrill Lynch. While the urge to get out of the market is strong for many, with yields remaining low, and few other options, investors should carefully restructure holdings to lower volatility and increase safety.