Investing

5 Merrill Lynch SMID-Cap Alpha Stocks to Buy Now

Lee Jackson

For years the Russell 2000 has underperformed the S&P 500 as investors sought the largest and most liquid stocks to own as the 2008 collapse still resonated firmly in their minds. With the Russell bouncing back and hitting highs, more and more investors are looking to own these stocks.

A new report from Merrill Lynch profiles the firm’s SMID-Cap Alpha list of stocks to buy, which bounced back in February returning 7.7%, versus the Russell 2500 at 6.0%. The list is now leading the benchmark year to date, with a gain of 4.9% versus 3.8%.

The Merrill Lynch team picks stocks with a market cap between $1 billion and $5 billion, which is where the Russell 2500 stocks are chosen. So stocks at the top end are really in the mid-cap category. We screened the list for five stocks to buy now with exceptional upside potential.

Restoration Hardware Holdings Inc. (NYSE: RH) has been a momentum trader’s dream since coming back from private equity just over two years ago. The company is a high-brow retailer of home furnishings. Its product categories include furniture, lighting, textiles, bathware, decor, outdoor and garden, tableware and children’s furnishings. As of the most recent report, Restoration Hardware operated 70 retail stores, consisting of 62 Galleries, five full-line Design Galleries and three Baby & Child Galleries, as well as 17 outlet stores in the United States and Canada.

The Merrill Lynch price target for the stock is $110. The Thomson/First Call consensus price target is lower at $100.38. Shares closed Wednesday at $91.43.

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Spirit Airlines Inc. (NASDAQ: SAVE) is an ultra low-cost carrier that has been on fire, like most of the airlines, as fuel costs have plummeted. The company was recently named by Air Transport World at the Value Airline of the Year at the 41st Annual Industry Achievement Awards ceremony. The carrier’s super low prices, which are way below industry standard, allow customers to pay up to choose additional amenities.

The Merrill Lynch price target is $95, and the consensus figure is set at higher at $98.50. The stock closed Wednesday at $76.38.

Take-Two Interactive Software Inc. (NASDAQ: TTWO) is a top video game producer that has cashed in with some super hot titles. The company offers its products under labels including Rockstar Games and 2K. It develops and publishes action/adventure products under the Grand Theft Auto brand, as well as other franchises, including L.A. Noire, Max Payne, Midnight Club and Red Dead under the Rockstar Games label. The Grand Theft Auto franchise has been one of the best-selling video games ever released.

The Merrill Lynch target price is only $23, and the consensus target is at $33.56. The stock closed trading on Wednesday at $25.05.

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Tessera Technologies Inc. (NASDAQ: TSRA) and its subsidiaries license technologies and intellectual property to customers and others who implement it for use in areas such as mobile computing and communications, memory and data storage, and 3DIC technologies. The company’s technologies include semiconductor packaging and interconnect solutions, and products and solutions for mobile and computational imaging, including FaceTools, FacePower, FotoSavvy, DigitalAperture, face beautification, red-eye removal, High Dynamic Range, autofocus, panorama and image stabilization intellectual property.

Tessera investors are paid a 2% dividend. Merrill Lynch has a price objective of $50, while the consensus target is slightly higher at $51.25. The stock closed at $39.62 a share.

Ubiquiti Networks Inc. (NASDAQ: UBNT) recently announce what it calls a revolutionary new platform for the global last-mile wireless industry named airFiber X. Purpose-built from the ground up, airFiber X is a ruggedized outdoor point-to-point radio platform designed for the global unlicensed frequency bands. The company provides a wide assortment of networking products and solutions for service providers and enterprises in the United States and internationally.

Merrill Lynch has a $40 price target, and the consensus target is $37.93. Shares closed the trading day Wednesday at $31.72.

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While the Merrill Lynch SMID-Alpha stock picks may have a higher volatility than the benchmark, they are also designed for more aggressive growth accounts. These stocks are a good fit in a long-term portfolio.