As incredible is it may seem, 2019 is already half over and we are in the third quarter, with all the major indexes hitting record all-time highs. Very dovish Humphrey-Hawkins testimony from Federal Reserve Chair “Jay” Powell drove stocks to new highs this week, and the market now anticipates at least a 25-basis-point cut at the end of the month. Some are even suggesting the potential for a half a percentage point cut.
In a new research report, Merrill Lynch is among the first out with top ideas for the third quarter of 2019. The firm has eight stocks to buy and two that are expected to underperform. Here we focus on the long ideas, and at first glance, they look like outstanding stock picks for growth accounts.
AMD
This top company has clearly turned the corner, and it had some solid news this week. Advanced Micro Devices Inc. (NYSE: AMD) is one of the largest suppliers of PC microprocessors and graphics processors worldwide to computing original equipment manufacturers. The company’s main product lines include desktop, notebook and graphics processors, and embedded/semi-custom chips.
Last year the company released its first major offering in five years, the Ryzen chipset, which many feel is uniquely positioned to compete with the big players like Intel and Nvidia in the $50 billion total addressable market for personal computers, gaming, artificial intelligence and servers.
The Merrill price target for the shares is $40, while the Wall Street consensus target is much lower at $30.68. The shares closed Thursday at $33.06.
Burlington Stores
This top retail stock has been on fire and is also on the Merrill Lynch US 1 list. Burlington Stores Inc. (NASDAQ: BURL) is a national off-price retailer of high-quality branded apparel with more than 500 locations in 44 states and Puerto Rico. Burlington also operates an e-commerce business.
The company sources from over 5,000 vendors, with a focus on nationally recognized brands. Similar to other off-price retailers, the company employs an everyday low price model and offers discounts of 60% to 70% off department and specialty stores’ regular prices.
Merrill has a $190 price target, and the consensus estimate is $176.94. Shares closed at $178.75 on Thursday.
Dropbox
This company had a hot initial public offering last year, which has come back to earth and could be offering investors a great entry point. Dropbox Inc. (NYSE: DBX) provides cloud-based file sharing and collaboration platform, and it has over 500 million registered users across 180 countries. The company generates revenue by selling cloud file storage and collaboration tools for subscription fees.
Dropbox had an estimated 12.7 million paid subscribers at the end of 2018. Core markets include public cloud storage and collaboration software, with longer-term opportunities in content management and project and portfolio management.
The $33 Merrill price target compares with a $32.27 consensus target. The stock closed most recently at $25.96.
Fidelity National Information Services
This top stock has been on fire all year. Fidelity National Information Services Inc. (NYSE: FIS) is a global leader in banking and payments technology, as well as consulting and outsourcing solutions, and serves more than 14,000 institutions in over 130 countries. It provides state-of-the-art software, services and outsourcing of the technology that empowers the financial industry.
In 2018, the company generated revenues of $8.1 billion, with adjusted EBITDA of $3.1 billion, adjusted earnings per share of $6.95 and $1.4 billion in free cash flow. Fidelity National serves more than 20,000 clients in over 130 countries. Headquartered in Jacksonville, Florida, the company employs more than 47,000 people worldwide and holds leadership positions in payment processing, financial software and banking solutions.
Shareholders receive a 1.10% dividend. Merrill has set its price objective at $143. The consensus target is $138.65, and shares closed at $127.82.
HD Supply Holdings
This off-the-radar pick could hold some serious upside potential. HD Supply Holdings Inc. (NYSE: HDS) is one of the leading industrial distributors in North America, operating in two key sectors: Facilities Maintenance and Construction & Industrial.
The company supplies over a million SKUs to roughly 500,000 diverse customers, which include multifamily building and hotel operators, contractors, maintenance professionals, home builders and industrial businesses. It operates out of 635 locations in 46 states and nine Canadian provinces.
Merrill has a $51 price objective. The consensus figure is $47.57, and shares ended Thursday at $40.09.
Masco
This is another lesser known stock that has solid growth potential. Masco Corp. (NYSE: MAS) is a leading building products company, manufacturing and selling paints, faucets, shower heads and other plumbing, cabinets, windows and other hardware products. Approximately 85% of 2018 sales were attributable to residential repair and remodel activity, with the remaining 15% from new residential construction.
The company’s portfolio of industry-leading brands includes Behr paint; Delta and Hansgrohe faucets, bath and shower fixtures; KraftMaid and Merillat cabinets; Milgard windows and doors; Kichler decorative and outdoor lighting; and HotSpring spas.
Masco investors receive a 1.25% dividend. The Merrill price target of $56 is well above the $46.87 consensus target. The stock closed at $38.12.
Northrop Grumman
This top defense company was ranked as one of the top five defense contractors by sales last year. Northrop Grumman Corp. (NYSE: NOC) provides innovative systems, products and solutions in unmanned systems, cyber, C4ISR and logistics and modernization to government and commercial customers worldwide.
The Aerospace Systems segment designs, develops, integrates and produces manned aircraft, unmanned systems, spacecraft, high-energy laser systems, microelectronics and other systems and subsystems.
The Information Systems segment offers advanced solutions for Department of Defense, national intelligence and federal civilian, state, international and commercial customers. It provides products and services primarily in the fields of command and control, communications, cyber, air and missile defense, intelligence processing, civil security, health information technology, and government support systems.
The Technical Services segment provides logistics, modernization and sustainment services, as well as other advanced technology and engineering services, including space, missile defense, nuclear security, training and simulation services.
Shareholders receive a 1.63% dividend. The Merrill price objective is $355, but the consensus target price is $372.06. Shares closed most recently at $324.93.
Vale
This mining stock could be a solid way to play improving growth worldwide. Vale S.A. (NYSE: VALE) is the largest producer of iron ore and pellets and the largest nickel producer. Vale also produces copper, coal, manganese and ferroalloys and holds equity stakes in some steel producers/projects.
A special Senate committee in Brazil recently issued several nonbinding suggested responses to Vale’s tailings dam tragedy. The Merrill team thinks the shares overreacted but did note risk of indicting a well-liked chief financial officer and an unlikely sharp tax hike. With iron ore setting new highs, the analysts stay very positive long term.
Shareholders see a 3.82% dividend. The Merrill price objective stands at $16, which compares to a $14.95 consensus estimate and the most recent close at $13.84.
The two stocks Merrill rates as Underperform are Illinois Tool Works Inc. (NYSE: ITW) and RH (NYSE: RH). More aggressive accounts may want to consider these ideas as possible short sale candidates for the third quarter.
Eight great stock ideas for the third quarter of 2019, along with two potential short sale ideas. All the long picks make good sense for growth portfolios looking to perhaps take some profit and move to new positions.
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