After a long hard look, and some serious thought on where prices are heading. Merrill Lynch has upgraded the energy sector to Overweight, and the timing looks solid. It is one thing to try to catch the proverbial falling knife. It is quite another to have the patience and make sure a real turn is underway, something the Merrill Lynch team did.
While acknowledging that downside risk to oil prices kept them on the sidelines, Savita Subramanian, the outstanding Merrill Lynch equity strategist, and her team kept a close eye on commodity pricing and movement, and they are now convinced the bottom is behind us. They also note current very low sentiment and valuations in the sector that are at 30-year lows.
Lastly, they remain biased for what they call the “big, old and ugly” energy stocks, which are mega-cap leaders. These make good sense for investors, as they have shown long-term staying power and most pay outstanding dividends. We scanned the Merrill Lynch research data base for the top stocks in that category to buy.
This company may offer investors some of the best total return possibilities. ConocoPhillips (NYSE: COP) is a large integrated name that draws a solid look at Merrill Lynch. The company has spent the past five years divesting assets, and although it is cash rich, it has somewhat dampened earnings and growth expectations all year long. At this juncture, with oil looking like it has found a bottom, and the market watching Saudi Arabia’s recent change of leadership, many analysts may feel more comfortable with the stock. The company’s big production ability in the Eagle Ford could bode well for the future.
The Merrill Lynch analysts feel that can Conoco can accelerate growth from reloaded portfolio depth in the Bakken and Eagle Ford, with visibility on future growth from a newly disclosed sizable position in the Permian.
ConocoPhillips investors are paid a very strong 4.44% dividend. The Merrill Lynch price target on the stock is $85. The Thomson/First Call consensus price target is $75.04. The stock closed Thursday at $65.58 per share.