Investing

Merrill Lynch Says Jump on These 5 Dow Jones Industrial Average Laggards

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They always say that the proverbial rising tide lifts all boats. Stock investors know that is about the farthest thing from the truth, especially in years where the bulk of the gains in the broad indexes like the S&P 500 are driven by a handful of hot momentum tech stocks.

The venerable Dow Jones industrial average is having a solid year, up just under 6%, but many of the top names in the index are down for 2018 and may be offering investors enticing entry points.

We screened the index against the Merrill Lynch research universe and found five stocks that are rated Buy and are still down for the year. All make good sense for growth investors looking for value in a market that is clearly rich.

3M

This top industrial that could really jump with continued economic pickup, and the shares are still down almost 12% this year. 3M Co. (NYSE: MMM) is a diversified, global manufacturer. Its businesses are technology-driven and organized under five segments: Consumer, Safety and Graphics, Electronics and Energy, Healthcare, and Industrial. Its popular brands include Scotch, Post-It, 3M and Thinsulate. The company also holds over 500 U.S. patents.

Last year the company entered into a definitive agreement with Johnson Controls to acquire the latter’s operating unit Scott Safety. The deal, which was worth $2.0 billion, likely will boost 3M’s technology, manufacturing, global capabilities and brand. In addition, it will enable the company to expand its recent portfolio actions within the Safety and Graphics business to help position for long-term success.

3M shareholders receive a 2.6% dividend. The Merrill Lynch price target for the stock is $255, and the Wall Street consensus target is $210.36. The stock closed Monday at $209.53.

Goldman Sachs

This stock trades at a very reasonable 9.35 times estimated 2019 earnings, and it is a member of the Merrill Lynch US 1 list. 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. The firm continues to be a dominant force around the world, one of the most sought-after banks one of the very few firms that dictate who can be a client.

In investment banking, the company has the preeminent client franchise. Goldman Sachs advised on more than $1.5 trillion of announced mergers and acquisitions transactions last year, the highest level the bank has ever recorded. It also has maintained a leading market share over the past 25 years.

Second-quarter profit surged 40% year over year, exceeding analysts’ estimates on better-than-expected revenue from every major business with the exception of trading. Three of the bank’s four main businesses all posted surprisingly strong results, thanks to higher private equity gains and fees from equity issuance.

Shareholders receive a 1.4% dividend. Merrill Lynch has a $280 price target, and the consensus target is $276.23. The stock closed Monday at $227.89.

IBM

This blue chip leader may still be offering investors the best entry point in years, as it is down almost 4% in 2018. International Business Machines Corp. (NYSE: IBM) is a leading provider of enterprise solutions, offering a broad portfolio of information technology (IT) hardware, business and IT services, and a full suite of software solutions. The company integrates its hardware products with its software and services offerings in order to provide high-value solutions.

IBM’s five major segments are: 1) Cognitive Solutions, 2) Global Business Services, 3) Technology Services & Cloud Platforms, 4) Systems and 5) Global Financing. Analysts cite the company’s potential in the public cloud as a reason for their positive outlook going forward.

For the second quarter, IBM beat analyst expectations on both revenue and earnings per share, despite some currency headwinds. At current trading levels the stock is a bargain, especially if the company can continue to grow its cloud business.

IBM shareholders receive a 4.24% dividend. The $200 Merrill Lynch price target compares with a $164.50 consensus estimate. The shares closed Monday at $147.94.

McDonald’s

The fast-food giant remains a solid pick for investors seeking dividends and a degree of safety, and its shares are down over 8% in 2018. McDonald’s Corp. (NYSE: MCD) is the world’s leading global foodservice retailer, with over 36,000 locations serving approximately 69 million customers in over 100 countries each day. More than 80% of McDonald’s restaurants worldwide are owned and operated by independent local business persons.

Second-quarter diluted earnings per share increased 12% (9% in constant currencies) year over year, reflecting $0.09 per share of strategic restructuring charges. Excluding these charges, diluted earnings per share increased 15% (12% in constant currencies), excluding $0.03 per share of prior year strategic charges.

In the United States, second-quarter comparable sales increased 2.6%, driven by growth in average check, resulting from both product mix shifts and menu price increases. Operating income for the quarter decreased 7%, primarily due to the strategic restructuring charge. Excluding this charge, operating income increased 1%, as higher franchised margin dollars were partly offset by lower company-operated margin dollars.

McDonald’s shareholders receive a 2.55% dividend. Merrill Lynch has set its price target at $190. The consensus target is $183.46, and shares closed Monday at $158.14.

Walmart

The giant retailer is another candidate for increased storm-related sales. 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 company announced in the summer plans to acquire a 77% stake in India e-commerce retailer Flipkart in a $16 billion debt and cash transaction. The deal dramatically expands Walmart’s presence in India, where online retail is growing quickly and Flipkart is a leader. The deal is expected to close in fiscal 2019 and could be dilutive for the foreseeable future. Some are blaming the huge deal as a reason for the stocks so-so performance.

Shareholders receive a 2.19% dividend. The Merrill Lynch price target is $115. The consensus target is $104, and shares closed trading Monday at $94.82.

These five top stocks that have all lagged this year and are offering incredible entry points for investors with a longer time horizon. They all offer good growth potential and don’t come with massive valuations like some of the FANG stocks. All are also safer picks in a very pricey market.

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