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Mega-Caps Posted the Biggest Earnings Surprises: 4 to Buy Now

Even though many pundits on Wall Street predicted lousy first-quarter earnings, only one thing can be said with over 90% of the S&P 500 reports in for the quarter: “Not so fast.” With 445 companies having reported earnings so far, the numbers represent a 6% beat versus consensus expectations at the start of earnings season. This also is the largest earnings beat since the first quarter of 2012.

A new research report from Savita Subramanian and her well-regarded team at Merrill Lynch points out that some of the biggest positive surprises have been from the mega-cap stocks. In fact, they point out that nearly three-quarters of the largest 50 companies in the S&P 500 have beaten earnings estimates.

We screened the Merrill Lynch research universe for four mega-cap stocks rated Buy that are still attractive after the earnings season.

Altria

The maker of tobacco products and wine scored an excellent first quarter. Altria Group Inc. (NYSE: MO) is a top mega-cap consumer discretionary stock to buy on Wall Street, and the company’s Marlboro brand remains one of the most recognizable in the world.

Many Wall Street analysts concede that the stock has solid downside support owing to the generous dividend yield, which remains at a huge premium in relation to the 10-year Treasury rate. Cash flow generation and the return of cash to Altria shareholders remain key facets of the company’s total shareholder return, and the analysts expect support of the strong dividend, which they believe will continue to climb, and strong share repurchase activity.

The company reported a 12% increase in earnings per shares to $0.63, which was ahead of the Merrill Lynch estimates. Revenues, net of excise taxes, increased 6.6% to $4.3 billion, backed by higher sales in all the segments.

Altria investors are paid an outstanding 4.03% dividend. Merrill Lynch has a $62 price target. The Thomson/First Call consensus estimate is set at $57.33. The stock closed Monday at $51.34.

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Apple

This stock is still the top technology company for long-term investors to own. Apple Inc. (NASDAQ: AAPL) is the world’s biggest and boldest technology company and has stayed in the limelight with the release of the new Apple Watch. While not generating the kind of in-store mania the iPhone 6 release did, reports indicate over a million orders for the new wearable device were taken by the company. Apple is hardly a stranger to the tech hierarchy, and the company passed another milestone when it was added to the Dow Jones Industrial Average in March, replacing the venerable AT&T.

Apple crushed earnings expectations when it reported fiscal second-quarter earnings late last month. It posted quarterly revenue of $58 billion and quarterly net profit of $13.6 billion, or $2.33 per diluted share. These results compare to revenue of $45.6 billion and net profit of $10.2 billion, or $1.66 per diluted share, in the year-ago quarter. Gross margin was 40.8%, compared to 39.3% in the year-ago quarter. International sales accounted for 69% of the quarter’s revenue.

The company also increased the share buyback program with an authorization of $140 billion, compared to $90 billion last year. Stockholders will also get an 11% higher dividend of $0.52 per share.

Apple investors are now paid a 1.65% dividend. The Merrill Lynch price target is $145, and the consensus target is $148.05. The stock closed Monday at $126.32.

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