Merrill Lynch Out With Top Picks to Outperform the Market for the Rest of 2018

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Every major criterion used to judge the stock market is at multiyear highs. We are at a record number of trading days without a 5% correction. At 18 times forward earnings, the S&P 500 price-to-earnings multiple is at a stunning 15-year high. There is substantial optimism, but according to Merrill Lynch, euphoria has not crept in, yet. One thing’s for sure, stock picking should outperform passive index investing, and with a tactical pullback likely this month or in March, stock selection is critical.

A new Merrill Lynch report from outstanding strategist Anthony Cassamassino presents the firm’s top alpha generation ideas for the rest of 2018. These are static picks for the year, not quick trade ideas. Alpha is the excess return of a fund or manager to a benchmark. Essentially, how much that fund or manager outperforms the market.

We screened the top Alpha Generation picks and found five that have outstanding upside potential, all are rated Buy at Merrill Lynch.

Altria

This maker of tobacco products and wine has posted very solid numbers. 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 along with strong share repurchase activity. The board also recently raised the dividend by more than 8%.

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.

Altria investors receive a 3.78% dividend. The Merrill Lynch price target for the shares is $82, and the Wall Street consensus estimate is $77.31. The stock closed Thursday at $69.93.

Delta Air Lines

This company consistently has ranked highly on Wall Street and is a top transport to buy for 2018. Delta Air Lines Inc. (NYSE: DAL) employs over 80,000 employees worldwide and operates a mainline fleet of more than 700 aircraft. The airline is part of the SkyTeam global alliance and participates in trans-Atlantic joint ventures with Air France-KLM, Alitalia and Virgin Atlantic.

Delta’s key hubs and markets include Amsterdam, Atlanta, Boston, Detroit, Los Angeles, Minneapolis/St. Paul, New York-JFK, New York-LaGuardia, Paris-Charles de Gaulle, Salt Lake City, Seattle and Tokyo-Narita.

Delta investors receive a 2.16% dividend. Merrill Lynch has a $74 price objective, and the consensus price target is just $62.46. The stock closed Thursday at $56.42.

D.R. Horton

This is one of the highest volume builders in the United States and a top pick at Merrill Lynch. D.R. Horton Inc. (NYSE: DHI) is the largest public builder by closings in the country and is positioned in 78 metropolitan markets in six major regions. It develops single-family homes primarily for first-time and move-up buyers.

Approximately 80% of revenue is derived from the Southeast, South Central and West regions, all of which continue to see very solid growth. D.R. Horton also provides mortgage financing and title agency services to homebuyers.

Shareholders receive a 1.04% dividend. The $71 Merrill Lynch price target is well above the consensus target of $56.20. Shares closed Thursday at $48.08.

Equinix

This is one of the larger capitalization companies in the data center industry. Equinix Inc. (NASDAQ: EQIX) provides data center services to protect and connect the information assets for the enterprises, financial services companies, and content and network providers primarily in the Americas, Europe, the Middle East, Africa and the Asia-Pacific.

The company provides colocation services and related offerings, including operations space, storage space, cabinets and power for customers colocation needs; interconnection services, comprising physical cross connect/direct interconnections, Equinix Internet Exchange, Equinix Cloud Exchange, Equinix Metro Connect and Internet connectivity services; and managed IT infrastructure services, including installation of customer equipment and cabling, as well as equipment rebooting and power cycling, card swapping and emergency equipment replacement services.

Investors receive a 1.8% distribution. Merrill Lynch has set its target price at $520. The consensus target is $526.52, and shares closed Thursday at $444.54.

General Dynamics

This company, like other major defense prime contractors, had a very solid year and is also on the Merrill Lynch US 1 list. General Dynamics Corp. (NYSE: GD) 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.

Investors receive a 1.49% dividend. The Merrill Lynch price target is $260. The consensus estimate is $241.84, and shares closed Thursday at $225.21.

Five top Alpha Generation ideas from the analysts at Merrill Lynch that also are solid dividend payers. These stocks make good sense for long-term growth accounts that can buy good ideas and put them away for a reasonably long time.