One of the keys for small-cap portfolio managers is strength in the domestic economy. Most of the firms that we cover on Wall Street are reasonably bullish on the prospects for the U.S. economy this year. With growth estimates ranging anywhere from 2.75% to 3.5%, anything remotely close to those figures could help to ignite small-cap stocks.
The Merrill Lynch Endeavor list offers their top small-cap picks. We went through the list to find not only their top stocks to buy, but the names that had the highest profile in terms of recognition. While many strategists say to stay with large cap stocks this year, blending in an allocation of small caps can help add alpha to a solid blue chip book.
Here are the top Merrill Lynch Endeavor small cap stocks to buy.
Alaska Air Group Inc. (NYSE: ALK) has shown solid growth, and the stock has been on fire over the past two years. What makes Alaska Air special among the airlines is not really a big mystery anymore — the company has limited itself to a somewhat narrow geographic focus, established a low-cost base and then leveraged good customer satisfaction into strong market share, good profitability and an uncommonly strong balance sheet. Serving primarily the West Coast has been a solid strategy for the company. Investors are paid a 1% dividend. The Merrill Lynch price target for the stock is $90. The Thomson/First Call estimate is $92.33. The stock closed Wednesday at $78.24.
Cadence Design Systems Inc. (NASDAQ: CDNS) is a top technology small-cap name to buy at Merrill Lynch. The company is a supplier to Microsoft, providing chips for the Xbox One audio system. Microsoft leveraged the company’s customization technology to quickly create the optimal solution to meet its high-quality audio requirements. The Merrill Lynch price target is $18, and the consensus target is $17.70. Shares closed Wednesday at $14.58.
ITT Educational Services Inc. (NYSE: ESI) is a for-profit education company that offers technology-oriented undergraduate and graduate level post-secondary education to approximately 59,000 students in 39 states and online through 140 ITT-Technical Institute campuses and Daniel Webster College. The company has a very strong brand, and it has not been the subject of the kind of scrutiny that many for-profit schools have. The Merrill Lynch price target is $42, and the consensus target is much lower at $31.13. ITT closed Wednesday at $30.60.
Jack in the Box Inc. (NASDAQ: JACK) is a top small-cap fast-food name to buy at Merrill Lynch. The stock has absolutely been on fire over the past year, and the Merrill Lynch team thinks there is more to come. During a recent investor presentation, Jack in the Box highlighted many of its priorities, innovations and plans going forward for both its Jack in the Box and Qdoba restaurant concepts. Both concepts are already the second-largest quick-service hamburger chain and fast-casual Mexican concepts, respectively, by profits, margins and returns. Merrill Lynch has a $57 price target, and the consensus target is $53.36. Shares closed Wednesday at $51.74.
Mentor Graphics Corp. (NASDAQ: MENT) is another top tech name to buy at Merrill Lynch. The company is a world leader in electronic hardware and software design solutions, providing products, consulting services and award-winning support for the world’s most successful electronic, semiconductor and systems companies. Established in 1981, the company reported revenues in the most recent fiscal year of more than a $1 billion. Investors are paid a small 0.9% dividend. The Merrill Lynch price target is $26, while the consensus is posted at $25.43. Mentor Graphics closed Wednesday at $19.69.
Sonic Automotive Inc. (NYSE: SAH) is a top small-cap consumer discretionary name. The company operates as an automotive retailer in the United States. It engages in the sale of new and used cars, light trucks and replacement parts; provision of vehicle maintenance, warranty repair, paint and collision repair services; and arrangement of extended service contracts, financing, insurance and other aftermarket products. With more than 100 dealerships in 14 states, the company has benefited from the increase in domestic auto sales. Investors are paid a small 0.5% dividend. Merrill Lynch has a strong $32 price target, and the consensus target is $27.17. Shares ended Wednesday at $21.33.
Standard Pacific Corp. (NYSE: SPF) is a top homebuilder to buy and it may offer great value to shareholders. Like many homebuilders, the company is very positive on this spring’s selling season. The bad winter weather may have postponed some new home sales, and demand is very high is some of its top areas, like California. The Merrill Lynch price target is $10, and the consensus target is $9.70. The stock closed Wednesday at $8.50.
Swift Transportation Co. (NYSE: SWFT) is a top transport to buy for 2014 at Merrill Lynch. This stock may have huge upside if the shorts who are currently circling it are wrong. A staggering 21.5 % of the shares have been sold short, despite earnings estimates being raised. While some of the short sellers have indeed covered some of the huge position that was on last fall, more good news could drive the remaining shorts to cover. Merrill Lynch has posted a price target of $28. The consensus is at $26.44. Swift closed Wednesday at $23.41.
While many of the Merrill Lynch names are highly recognizable, they all have very solid businesses and brands. They also are larger than some small cap names, some bordering on being mid caps. Adding these high-growth names can have a solid portfolio effect, especially if the economy heats up the rest of the year.