Merrill Lynch Out With Top Sector Picks for 2017: 7 to Buy Now

February 2, 2017 by Lee Jackson

While most of the companies we cover on Wall Street have released their top high-conviction ideas for 2017, those usually number just eight to 10 companies. Merrill Lynch is out with the firm’s top stocks picks for 2017 by the firm’s analysts by industry groups. This provides a far greater list of companies that the firm is focused on for alpha generation. Alpha again is the difference a stock provides above the benchmark. If the S&P 500 is the benchmark and it is up 5% and an individual stock’s provides a 7% return, there is 2% alpha.

We screened the list by sector looking for stocks with solid upside and that paid dividends. While rates are clearly going higher, dividends help provide investors total return, which is the gain in the stock added to the dividend. So if the Merrill Lynch picks provide total return and alpha, the upside potential for investors is outstanding.

We chose one stock from each sector and, of course, all are rated Buy at Merrill Lynch.

Basic Material and Industrial

Dow Chemical Co. (NYSE: DOW) makes sense in all markets. This large cap leader is a market-driven integrated, with an industry-leading portfolio of specialty chemical, advanced materials, agrosciences and plastics businesses. It delivers a broad range of technology-based products and solutions to customers in approximately 180 countries and in high-growth sectors such as packaging, electronics, water, coatings and agriculture. Last year, Dow had annual sales of more than $58 billion and employed approximately 53,000 people worldwide.

In 2016 the company announced a huge merger with DuPont. They are planning to combine into a company valued at about $120 billion. They will then split off into three separate companies, one focused on materials, one on agriculture and one on nutrition and electronics specialty products. Many on Wall Street think that the merger offers a very solid investment for the future, and the sum-of-the-parts total may be far greater than the current value of the stocks.

Dow Chemical investors receive an outstanding 3.09% dividend. The Merrill Lynch price target is $64, and the Wall Street consensus target is $66.06. The stock closed Wednesday at $60.30.

Capital Goods-Industrials

Like other major defense prime contractors, General Dynamics Corp. (NYSE: GD) had a very solid 2016 and remains one the best ideas at Merrill Lynch in defense/aerospace sector. This company is engaged in business aviation, land and expeditionary combat vehicles and systems, armaments, munitions, shipbuilding and marine systems, and information systems and technologies.

Major products include Virginia-class nuclear-powered submarine and Ohio-class replacement, Arleigh Burke-class Aegis, Abrams M1A2 tank, Stryker 8-wheeled assault vehicle, medium-caliber munitions and gun systems, tactical and strategic mission systems.

Shareholders receive a 1.7% dividend. Merrill Lynch has a $210 price target. The consensus target is $202.17. Shares closed most recently at $181.03.

Tech-Media-Telecom

A top telecommunications pick at Merrill Lynch for 2017, Verizon Communications Inc. (NYSE: VZ) is a global leader in delivering the digital world. Verizon Wireless operates America’s self-described most reliable wireless network, with 109.5 million retail connections nationwide. Verizon also provides converged communications, information and entertainment services over America’s most advanced fiber-optic network, and it delivers integrated business solutions to customers worldwide.

Last year Verizon announced the purchase of Yahoo’s core operating business for $4.8 billion in cash, although terms may be changing due to the massive data breaches at the company. The analysts feel the purchase plays into Verizon’s strategic drive to expand into advertising and content, and they also think the transaction is largely immaterial from a financial perspective. There was also some chatter recently that the company may be looking at Charter Communications.

Verizon investors receive a 4.77% dividend. The $59 Merrill Lynch price objective compares with the consensus target of $52.23. The shares closed Wednesday at $48.39.

Health Care

This top stock has been hit hard over the past year, with shares down over 25% since May, but is also in the Merrill Lynch US 1 portfolio. CVS Health Corp. (NYSE: CVS) provides integrated pharmacy health care services. Its Pharmacy Services segment offers pharmacy benefit management solutions, such as plan design and administration, formulary management.

The Retail/LTC segment sells prescription drugs, over-the-counter drugs, beauty products and cosmetics, personal care products, convenience foods, seasonal merchandise and greeting cards, as well as provides photo finishing services. It operates 9,655 retail stores in 49 states, the District of Columbia, Puerto Rico and Brazil, primarily under the CVS Pharmacy, CVS, Longs Drugs, Navarro Discount Pharmacy and Drogaria Onofre names. It also operates online retail pharmacy websites and 32 on-site pharmacy stores, long-term care pharmacy operations and retail health care clinics.

Note that some think Warren Buffett may have his eye on the company.

CVS investors receive a 2.57% dividend. The Merrill Lynch price target is $95. The consensus target is $87.95, and shares closed Wednesday at $77.97.

Consumer

Altria Group Inc. (NYSE: MO) has posted very solid numbers over the past year. The maker of tobacco products and wine 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 along with strong share repurchase activity.

To diversify away from cigarettes and cigars, Altria has expanded its portfolio into new categories like wine, e-cigarettes and a 27% stake in brewer SABMiller, which together generated nearly 10% of its pre-excise tax revenue last quarter. With SABMiller being acquired, Altria will have a huge stake in the world’s biggest beer company.

Investors receive a 3.43% dividend. The $75 Merrill Lynch price target is above the consensus estimate of $70.18 and the most recent close at $71.39.

Energy

This pick is a top utility that investors can still feel super-comfortable owning now. PG&E Corp. (NYSE: PCG) is one of the largest combined natural gas and electric utilities in the United States. Based in San Francisco, with more than 20,000 employees, the company delivers energy to nearly 16 million people in Northern and Central California.

The company operates 141,215 circuit miles of electric distribution lines, 18,616 circuit miles of interconnected transmission lines, 42,141 miles of natural gas distribution pipelines and 6,438 miles of gas transportation pipelines. It operates generation facilities with energy sources such as nuclear, hydroelectric, fossil fuel-fired and photovoltaic.

The company recently announced a clean fuel rebate of $500 starting this month. The rebate is a bonus for using electricity as a clean transportation fuel, and eligible electric vehicle owners can receive one rebate per owned or leased vehicle.

PG&E shareholders receive a 3.22% dividend. Merrill Lynch set its price target at $66. The consensus number is $65.84. Shares closed at $60.89.

Financial Institutions

Wells Fargo & Co. (NYSE: WFC) is another stock for investors to look at now for safety, dividends and solid upside potential. This large cap bank is a nationwide, diversified, community-based financial services company with $1.8 trillion in assets. The company provides banking, insurance, investments, mortgage and consumer and commercial finance through 8,700 locations, 12,800 ATMs, the internet and mobile banking, and it has offices in 36 countries to support customers who conduct business in the global economy. Wells Fargo serves one in three households in the United States.

Wells Fargo has slowly, but surely, become one of the biggest mortgage lending companies in the United States, in addition to its normal banking and brokerage businesses. A continued increase in commercial real estate lending could really boost the bank’s bottom line and overall revenue. The stock also remains a top Warren Buffett holding. He raised his holdings in the bank to 10% on the stock’s weakness last year.

Shareholders receive a 2.72% dividend. The Merrill Lynch price target is $65. The consensus price target is $57.92. Shares closed Wednesday at $55.91.

It is important to note that the Merrill Lynch categories are very broad and often encompass other sectors. However, these are the top picks at the company within their stated sectors, and we selected dividend-paying members. All make good sense for long-term growth and income accounts.

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