Finally, after what seems like an eternity, we are seeing some selling, and much to the dismay of those who got in late, it’s high time. Trading at a bloated 18 times estimated forward earnings, the S&P 500 by any and all measures is expensive. With that in mind, we also may be on the verge of the best economic run in a generation, and as long as interest rates don’t blow through the roof, 2018 should still be a positive year.
While it’s quite possible we could see another leg down in the S&P 500, the selling is positive in removing some of the overbought conditions that exist. Michael Hartnett, the chief investment strategist at Merrill Lynch, sees the reversal going to 2,686 on the venerable index, and a steeper drop to the 200-day moving average at 2,530 also isn’t out of the question.
Despite the gloom, investors with some dry powder, which we have advised raising for some time, could snap up some incredible bargains. We screened the Merrill Lynch research universe for companies that are rated Buy, posted solid fourth-quarter results, gave positive guidance and do well in a rising interest rate environment. We found five that look like solid plays.
This stock has broken out of a long trading range, and financials often do very well rates go higher. Citigroup Inc. (NYSE: C) has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. It provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management.
Trading at a still very cheap 10 times estimated 2018 earnings, the bank looks very reasonable in what has become a pricey stock market. A continuing stock buyback program is a big positive.
Merrill Lynch noted that the bank reported a “clean” fourth-quarter earnings per share that were better than expected. Revenues beat as well in the Institutional Clients Group and Global Consumer Banking. Trading was also better than feared. Feedback indicated more negative positioning into the quarter, which could drive stock higher.
Citigroup investors are paid a 1.6% dividend. The Merrill Lynch price target for the stock is $84. The Wall Street consensus price objective is $83.41. Shares closed Friday at 77.02, down almost 3% on the day.
This stock trades at a very reasonable 11.6 times Merrill Lynch’s estimated 2018 earnings, and it is another solid financial to add when the dust settles. Goldman Sachs Group Inc. (NYSE: GS) has a gigantic institutional equity, debt and derivatives business, an ultra-high net worth clientele, top investment banking and capital markets expertise.
Goldman Sachs, which is on the Merrill Lynch US 1 list, posted fourth-quarter results that beat analyst expectations. The bank continues to be a dominant force around the world and is one of the most sought after in the world. And it is one of the very few that dictate who can be a client at the firm.
Goldman Sachs shareholders are paid a 1.11% dividend. Merrill Lynch has a $300 price objective, and the posted consensus target price is $266.76. Shares closed Friday down almost 4.5% to $260.04.