Investing

5 Must-Buy Stocks If the Stock Market Retests Correction Lows

Lee Jackson

Published: February 23, 2018 9:50 am

Last Updated: January 12, 2020 3:07 am

It is very rare for a market to suffer a 10% correction, as this one did recently, and have what’s called a V-shaped recovery. That is where a low is touched and the market bounces right back and continues on its merry way. Typically, and the chirping pundits on financial television have called for this, the market will retest the low, and if it holds and goes higher then all is usually well.

With volatility heightened, we have continued to see days in which the market moves 500 points or more. When the Federal Reserve Minutes came out on Wednesday, we were quickly up 250 points, only to close down 166 as Treasury yields surged. This is not typical market action.

With the possibility for a retest probably better than 50-50, we screened the Merrill Lynch research universe for stocks that would be “must buys.” These five have catalysts and should be grabbed, especially if we see a big sell-off.

Cisco

This top mega-cap technology company recently reported an outstanding quarter. Cisco Systems Inc. (NASDAQ: CSCO) designs, manufactures and sells internet protocol (IP) based networking products and services related to the communications and information technology industry worldwide.

It provides switching products, including fixed-configuration and modular switches, and storage products that provide connectivity to end users, workstations, IP phones, wireless access points and servers, as well as next-generation network routing products that interconnect public and private wireline and mobile networks for mobile, data, voice and video applications.

The outstanding results reported came with a huge $25 billion stock buyback as well. Many think the company is poised to see the kind of multiple expansion this year that Microsoft saw in 2017. That could lift the shares significantly higher.

Shareholders receive a 3.07% dividend. The Merrill Lynch target price is $53, and the Wall Street consensus target is $42.26. The stock closed on Thursday at $42.94.

Energy Transfer Partners

This company merged with Sunoco Logistics Partners last year. Energy Transfer Partners L.P. (NYSE: ETP) engages in the natural gas midstream and intrastate transportation and storage businesses in the United States.

The company’s Intrastate Transportation and Storage segment transports natural gas from various natural gas producing areas, and through ET fuel system and HPL system. It owns and operates 7,500 miles of natural gas transportation pipelines and three natural gas storage facilities in Texas. Its Interstate Transportation and Storage segment provides natural gas transportation and storage services; owns and operates approximately 12,300 miles of interstate natural gas pipeline; and has interests in various natural gas pipelines.

The Midstream segment gathers, compresses, treats, blends, processes and markets natural gas. It owns and operates 35,000 miles of in service natural gas, 31 natural gas processing plants, 21 natural gas treating facilities and four natural gas conditioning facilities.

The company continues to deleverage and also posted huge numbers on Thursday. Merrill Lynch noted:

The company reported fourth quarter EBITDA of $1,938 billion, significantly above Merrill Lynch and the consensus estimates. On its earnings call, Energy Transfer upsized its 2018 organic growth capex guidance to $4.5 billion (from the prior $3 billion). We reiterate our Buy rating and raise our price target based on a 2019 estimated adjusted EV/EBITDA of 11.5x.

Unitholders receive a massive 12.4% distribution. Merrill Lynch raised its $23 price target to $26, above the consensus target of $24.14. Shares closed Thursday at $18.99 and traded higher in Friday’s premarket.

Expedia

This is an online travel leader that is poised for a potential big 2018. Expedia Inc. (NASDAQ: EXPE) is the leading internet travel pure-play with exposure to online travel in the United States, Europe and Asia. The company’s portfolio of brands includes Expedia, Orbitz, HomeAway, Travelocity, Hotels.com, Trivago, Egencia, Hotwire, Wotif, Venere and Classic Vacations.

The stock was hammered on a bad earnings print, and the analysts said this:

Expedia reported a fourth quarter miss and guided EBITDA growth to 6-11%, modestly below our 7-12% expectation on higher cloud spend. Bookings and room nights booked accelerated, signs that the business improved during quarter following a challenging third quarter. Despite the miss, we think investment strategy to accelerate growth in on track. Valuation attractive on several metrics.

Expedia investors receive a 0.8% dividend. The $138 Merrill Lynch target price compares with a consensus price target of $134.48. Shares closed Thursday at $104.53.

Salesforce.com

This top company reported solid fiscal 2018 second-quarter results as billings drastically improved, and it is on the Merrill Lynch US 1 list. Salesforce.com Inc. (NYSE: CRM) provides enterprise cloud computing solutions, with a focus on customer relationship management to various businesses and industries worldwide.

It offers enterprise cloud computing applications and platform services, including Sales Cloud that enables companies to store data, monitor leads and progress, forecast opportunities, gain insights through relationship intelligence and collaborate around sales on desktop and mobile devices.

The company also provides Service Cloud, which enables companies to deliver personalized customer service and support, as well as connect their service agents with customers on various devices; and Marketing Cloud, which enables companies to plan, personalize and optimize customer interactions.

Historically Salesforce tends to outperform in the first quarter of a calendar year, and with over a month remaining in the quarter for 2018, the stock would be a great pickup on another steep reversal.

The Merrill Lynch price target is $125, while the Wall Street consensus price objective is $124.42. The shares closed trading on Thursday at $113.

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Walmart

The giant retailer also is on the Merrill Lynch US1 list. Walmart Inc. (NYSE: WMT) is the world’s largest retailer, operating retail stores under the formats of Walmart Stores, Supercenters, Neighborhood Markets, as well as Sam’s Club locations, in the United States, and it has a growing e-commerce business (including Jet.com). Internationally, Walmart also operates locations in several countries, including Argentina, Brazil, Canada, China, Japan, Mexico and the United Kingdom.

Each week, nearly 260 million customers and members visit the company’s 11,535 stores under 72 banners in 28 countries and e-commerce sites in 11 countries. With fiscal year 2017 revenue of nearly $486 billion, Walmart employs approximately 2.2 million associates worldwide.

The stock was absolutely crushed after reporting earnings in which e-commerce sales came in below expectations. The stock suffered its worst trading day ever, and the analysts said to jump on shares after the decline:

Fourth quarter results reflect healthy momentum in the core US business, despite softer dot-com sales. Online growth should improve in fiscal 2019. We are raising our fisal 2019 estimate comparison forecast but our adjusted EPS remains $4.75 as we see offsets from investments in ecommerce and price. Walmart remains a “Discount Store Decade” top pick and we believe the pullback creates a particularly good buying opportunity.

Shareholders receive a 2.24% dividend. The Merrill Lynch price target is $120. The consensus target is $104.97, and shares closed Thursday at $92.77.

These five top stocks to buy have catalysts or a very solid franchise and got hit on one-off earnings disappointments. If we retest the lows these companies should be even more outstanding on a price basis, but could easily be bought now if the pundits are wrong and we don’t trade back down.