It’s hard to believe the first half of 2018 already has ended. It’s also hard to imagine that the Dow Jones industrials and S&P 500 have done very little in 2018 after all the volatility has shaken the U.S. equity markets higher and lower this year. Investors have had to rethink their “buy the dip” mentality in 2018 as the trend of the past five years has just been less reliable. Now many investors are wondering how they want to be positioned for the third and fourth quarters in 2018 and beyond.
Merrill Lynch released its high-conviction ideas for the third quarter ahead of the 4th of July holiday. These high-conviction ideas are based on the firm’s views of potential significant market and business-related catalysts that are likely to affect these stocks during the third quarter of 2018. Of the top 10, there were eight buys, spread across six sectors.
24/7 Wall St. has outlined the basics of each case for upside laid out by Merrill Lynch. The calls have been compared to the consensus analyst price targets (mean) from Thomson Reuters for a relative comparison against other research reports and valuations out there.
Allergan PLC (NYSE: AGN) led the list, and the pre-research level of $166.72 compared to the Merrill Lynch price objective of $213. Allergan’s consensus target price is just $208.43.
Merrill Lynch sees Allergan as the best positioned to benefit from key catalysts events among its pharmaceutical peers and sees it as meaningfully undervalued as investor faith in its business model has dissipated. All this adds up to investors debating the merits of a company split ahead of liver, migraine and wet age-related macular degeneration data.
DXC Technology Co. (NYSE: DXC) is an information technology (IT) services company on which Merrill Lynch has a $103 price objective, indicating implied upside of more than 27% from the recent $81 share price.
Merrill Lynch’s target is actually less than the consensus target price of $105.06. The firm believes that less than 10 times expected 2019 earnings is too cheap of a valuation against peers as the stock has witnessed some dislocation after the recent spin-off of its government services business. Merrill Lynch believes DXC can drive an improving trend in revenues and margins and sees its September analyst day as the primary catalyst for guidance out to 2020 and beyond.
Fluor Corp. (NYSE: FLR) has a $58 price objective at Merrill Lynch, indicating an implied upside of about 19%, without considering close to a 2% dividend yield. That target is almost $3.50 higher than the consensus target price of $54.57, and Fluor shares have a 52-week high above $62.
The firm sees Fluor having an attractive risk/reward to the improving energy and mining capex cycle in the coming years, and Merrill Lynch expects that 2018 should mark a trough in its backlog with improvement from mining and energy projects in the second half of 2018.
Honeywell International (NYSE: HON) has a $185 price objective at Merrill Lynch, indicating more than 28% in implied upside from the recent $144 share price. That is without considering the 2% dividend yield.