Merrill Lynch’s Key Stock Picks for the Fourth Quarter

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With or without mid-term elections, the last quarter of 2014 and January of next year could be a bonanza for stock investors. In a new report out from Merrill Lynch, the team points out that the fourth quarter usually is solid for investors. In fact, over the past 78 years, the S&P 500’s median total return from October through January of the following year has been 6%.

However, the 39 election years had better median returns of 8%, and the 19 mid-term election years saw particularly strong returns of 14%. While past results are not guaranteed to happen this year, it could be a banner close for stock investors. We screened the Merrill Lynch top large caps stocks to buy for five stocks that may make good sense for the final quarter and into 2015.

Alcoa Inc. (NYSE: AA) has been on a roll ever since the company was booted out of the Dow Jones Industrial Average, and Merrill Lynch just upgraded the stock to a rating of Buy from Neutral. The company will lead off the third-quarter earnings parade, as it traditionally does, when it reports on October 8. As a global leader in lightweight metals technology, engineering and manufacturing, Alcoa innovates multi-material solutions. The company’s technologies enhance transportation, from automotive and commercial transport to air and space travel, and improve industrial and consumer electronics products.

Alcoa investors are paid a 0.7% dividend. Merrill Lynch raised its price target on the stock to $18 from $16. The Thomson/First Call consensus target is $16.56. Shares closed trading on Tuesday at $18.18.

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Citigroup Inc. (NYSE: C) is on the Merrill Lynch U.S. 1 list and is a top financial stock to own going in to the fourth quarter. The stock is still trading below the highs hit back in January, and it may offer investors a tremendous entry point at these levels. Last week a U.S. judge said he would allow Citigroup to process a disputed $5 million payment by Argentina on bonds issued under its local laws following its 2002 default. The judge agreed to an order proposed by bondholders suing Argentina over defaulted debt to allow Citigroup to process the interest payment, which is due Sept. 30. Hedge funds had been screaming for payment and got their way.

Citigroup pays shareholders a tiny 0.1% dividend. The Merrill Lynch price target is set at $65, and the consensus target is $58.71. The stock closed Tuesday at $51.95 a share.

Facebook Inc. (NASDAQ: FB) has been on a huge roll the past three earnings reporting quarters, and many on Wall Street feel that the stock has plenty of room to run. Mobile revenue and advertising numbers have skyrocketed, and the company has started to add a search component that could prove to be another earnings silo for the social media giant. On Monday the company unveiled its much-anticipated ad platform as an answer for advertisers who want something better than the Web-restricted cookie to track and target ads. Atlas can follow Facebook members where they digitally roam, from Web to smartphone, smartphone to tablet. With more than 1.3 billion registered users around the world, Facebook’s e-commerce potential is also very significant and growing larger monthly.

Other positive trends are the continued growth of smart devices, a continued shift to 4G and increased mobile advertising monetization. The Merrill Lynch price target for Facebook is $92, and the consensus target is $86.78. Shares closed Tuesday at $79.36.

General Electric Co. (NYSE: GE) has horribly lagged the rally over the past two years and may provide investors a solid entry point for a top industrial stock. The company continues to expand its investment into energy, committing $10 billion to its “ecomagination” budget through 2020. GE plans to use the initiative to develop alternative technologies to replace water in the hydraulic fracturing process. With water shortages in places all across the United States, energy companies are looking for ways to cut back on water use. The iconic industrial trades at a low 15 times forward earnings.

Investors are paid a very solid 3.5% dividend from the blue chip company. The Merrill Lynch price target is $29 and the consensus price objective is $29.82. GE closed Tuesday at $25.67.

Pfizer Inc. (NYSE: PFE) trades at a low 14 times earnings and is one of the top pharmaceutical stocks at Merrill Lynch. The company updated investors and physicians this summer at a Wall Street conference on the Phase 2 trial results on palbociclib for advanced breast cancer. Palbociclib is also currently being tested in several Phase 3 trials, in combination with letrozole and other drugs. Results from those studies are expected next year, though there is a possibility that Pfizer could file for accelerated approval based on the results of PALOMA-1.

Investors are paid a generous 3.5% dividend. The Merrill Lynch price target is $36, and the consensus target is posted at $34.52. Pfizer closed Tuesday at $29.70 a share.

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Investors may want to stay focused on large caps stocks, especially those that have underperformed this year. Portfolio managers may be thinking about rotating into some of these top stocks that have been left somewhat behind in the large equity rally.