Merrill Lynch Says 5 Dow Jones Laggards Could Be 2018 Winners

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With just over three weeks left in 2017, it has been another banner year for stocks investors, with double-digit gains in all three major averages. Barring a big end-of-the-year meltdown, those gains should hold. The question is pretty simple: 2017 was great, but what do investors do for an encore in 2018?

Most Wall Street strategists are recommending investors stay with big, large cap stocks that have liquidity. If the selling starts, that last thing you want to be in is illiquid stocks with no bids to be found.

We screened the 30 stocks in the Dow Jones Industrial Average for companies that lagged the market in 2017. We found five that offer tremendous value and could be big 2018 winners. Plus, all five are rated Buy at Merrill Lynch.

Exxon Mobil

This top Wall Street energy pick is still down almost 9% in 2017. Exxon Mobil Corp. (NYSE: XOM) is the world’s largest international integrated oil and gas company. It explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa and elsewhere.

The company also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and specialty products, and it transports and sells crude oil, natural gas and petroleum products.

For 75 years in a row, Exxon has raised its dividend on a split-adjusted basis. Thanks to the company’s vertically integrated model in the oil and gas business, its profitability doesn’t suffer through commodity price swings like a company that’s a pure play in one segment of the value chain.

Shareholders receive a 3.74% dividend. The Merrill Lynch price objective is $94, while the Wall Street consensus target price is just $84.68. The stock closed Wednesday at $82.28 a share.

General Electric

This iconic blue chip industrial has been a huge laggard in 2017, and after cutting its dividend the most since the Great Depression it may be offering long-term investors a very promising entry point. General Electric Co. (NYSE: GE) is a highly diversified, global industrial company. Its businesses are organized broadly under these segments: Power, Renewable Energy, Energy Connections, Oil & Gas, Aviation, Healthcare, Transportation and GE Capital.

The company’s products and services include power generation equipment, aircraft engines, locomotives, medical equipment and compressors. Over half of the business is tied to service and aftermarket support.

According to the most recent filing from the SEC, Director James Tisch purchased 3 million shares of GE on November 21 at prices from $17.83 to 17.99 on behalf of Loews. Also, Chairman and CEO John Flannery and other high ranking officials at the company have bought shares at multiyear lows. Notably a director bought 55,000 shares totaling $1 million, and Flannery bought 60,000 shares for $1.1 million.

The road back for GE can be a long one, but the chances of the company ever going out of business are very remote.  Merrill Lynch said this after the company analysts day:

We lower our price objective, but we maintain our Buy for the following reasons: 1) The dividend cut is now behind us; 2) While the company’s lower 2018 outlook versus our and consensus’ forecast was not expected, we view the current outlook as the “true reset”; 3) GE is pre funding $6 billion of its pension obligations in 2018 by issuing debt, ameliorating some of the concerns about off-balance-sheet liabilities; 4) GE did not provide a lot of detail on potential spins/divestitures beyond highlighting part of Healthcare IT, Current & Lighting, Transportation, and its stake in Baker Hughes; however, we continue to think that the portfolio optionality goes well beyond that. 5) Our sum of the parts of $23, while lower, still points to 20%+ upside relative to the current stock price.

GE investors are now paid 2.64% dividend. Merrill Lynch has a $23 price objective, and the consensus price target is $22.65. The shares closed Wednesday at $17.66.