Merrill Lynch Adds Top Gaming Stock to Endeavor Small Cap Portfolio

May 31, 2018 by 247lee

With earnings for the first-quarter long over, and only one month remaining in the second quarter of 2018, many of the top companies we follow on Wall Street are making some changes to the lists of their high-conviction stock picks for clients. With the market showing volatility not seen in years, it makes sense to examine the lists and make some changes as the rest of the year could have additional volatility, as the political and geopolitical cycle could prove to be a very explosive component.

A new Merrill Lynch research report offers some big changes to the firm’s Endeavor Small Cap portfolio. Here we cover the new additions, as well as highlight three other top picks from the portfolio that could be outstanding summer additions for aggressive growth accounts looking for more small cap exposure.

In a very timely call noting the recent Supreme Court ruling on gambling, Merrill Lynch added Boyd Gaming Corp. (NYSE: BYD) to the portfolio. It operates as a multi-jurisdictional gaming company through three segments: Las Vegas Locals, Downtown Las Vegas and Midwest and South. The company owns and operates gaming entertainment properties located in Nevada, Illinois, Indiana, Iowa, Kansas, Louisiana and Mississippi.

The company also owns and operates a travel agency and a captive insurance company that underwrites travel-related insurance in Hawaii. As of December 31, 2017, the company owned and operated 24 gaming entertainment properties, offering a total of 1,358,856 square feet of casino space, 30,267 slot machines, 632 table games and 9,372 hotel rooms.

Boyd remains a favorite for Las Vegas locals and is substantially levered to the Las Vegas market. The company generally targets largely locals in this market. The company’s downtown properties also draw Hawaiian tourists. In general, Las Vegas locals performance is less impacted by weekends versus weekdays in a period than other gaming markets would be, as a substantial portion of the local economy works in hospitality.

The Merrill Lynch team also added an old-school construction firm to the Endeavor portfolio. KBR Inc. (NYSE: KBR) is a premier global engineering and construction company focusing on the energy sector and government services, with particularly strong resume in the liquefied natural gas (LNG) market, having built a third of the installed global capacity.

KBR operates through three segments. The Government Services segment offers life-cycle support solutions to defense, space, aviation, and other programs and missions for government agencies in the United States, the United Kingdom and Australia.

Technology & Consulting includes proprietary technology focused on the monetization of hydrocarbons (especially natural gas and natural gas liquids) in ethylene and petrochemicals; ammonia, nitric acid and fertilizers; oil refining; gasification; oil and gas consulting; integrity management; naval architecture and proprietary hulls; and downstream consulting

Engineering & Construction includes onshore oil and gas; LNG (liquefaction and regasification)/GTL; oil refining; petrochemicals; chemicals; fertilizers; differentiated EPC; maintenance services (Brown & Root Industrial Services); offshore oil and gas.

Merrill Lynch has a $45 price target on Boyd shares, and the Wall Street consensus target was last seen at $39.23. The stock traded early Thursday at $38.05.

KBR shareholders are paid a 1.71% dividend. The Merrill Lynch price objective is $20, while the consensus price target is $19.38. Its shares traded at $18.50.

We found three additional companies in the portfolio that look not only very attractive now, but very timely as well.

CyrusOne

This is a top pick among the data center stocks. CyrusOne Inc. (NASDAQ: CONE) designs, builds and operates facilities across the United States, Europe and Asia that give its customers the flexibility and scale to match their specific growth needs. Specializing in highly reliable enterprise-class, carrier-neutral data center properties, the company provides robust data center infrastructure to ensure the continued operation of IT equipment for a rapidly growing list of organizations that now nears 900, including nine of the Fortune 20 and more than 160 of the Fortune 1,000 or equivalent-sized companies.

Many analysts feel that some of the best returns in the data center sector may be found in the smaller players in the space like CyrusOne. The stock trades at numerous lower multiples than their bigger competition and top analysts feel that the discount valuation is not warranted given the recent surge in leasing and above-average growth. The company has also exhibited faster deployment times, rapid new market expansion and low churn among customers, all bullish reasons for buying the stock.

CyrusOne unitholders are paid a solid 3.33% distribution. The $60 Merrill Lynch price objective is less than the $63.71 consensus target. The shares at $54.65 Thursday morning.

HubSpot

This stock has had a solid run since selling off late last year. HubSpot Inc. (NYSE: HUBS) is a cloud-based provider of inbound marketing tools such as website content management, blogging tools, email campaign, search engine optimization, social media monitoring and management, CRM and others for small businesses and mid-sized companies.

The company’s tools provide a single console for marketing professionals to generate new customer leads, convert leads to customers and customers to repeat customers.

This is a top technology holding among the managers in the survey, and a Jefferies report notes that 39.5% of those surveyed own shares in their portfolios.

Merrill Lynch has set its price target for the shares at $135. The consensus target is $123.81, and the stock traded at $121.25 a share.

International Game Technology

This company has been hit some after doing a secondary where a large shareholder did a forward sale and is offering a great entry point. International Game Technology PLC (NYSE: IGT) is the global leader in gaming. The company enables players to experience their favorite games across all channels and regulated segments, from Gaming Machines and Lotteries to Interactive and Social Gaming.

Leveraging a wealth of premium content, substantial investment in innovation, in-depth customer intelligence, operational expertise and leading-edge technology, International Game Technology gaming solutions anticipate the demands of consumers wherever they decide to play. The company has a well-established local presence and relationships with governments and regulators in more than 100 countries around the world, and it creates value by adhering to the highest standards of service, integrity and responsibility.

Many top Wall Street analysts feel the company will be one of the major gaming infrastructure beneficiaries from the recent Supreme Court ruling.

Merrill Lynch has a $36 price target. That compares to the consensus target of $34.17 and the recent share price of $26.05.

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Two new portfolio additions and three companies that also could be outstanding additions with the potential for near-term catalysts. Again, all are better suited for aggressive growth accounts.