Merrill Lynch's Top Second-Half 2019 Small and Midcap Stock Picks

As the markets have raced to historic highs, it’s important to remember that the so-called FAANG stocks, (Facebook, Apple, Amazon, Netflix and Google) have driven much of the record-breaking performance not only this year but over the past five years. With the market clearly close to, or at full value, it makes sense to look to areas where alpha can be generated for the rest of 2019.

An area that could make sense for investors now could be the small and midcap stocks (SMID), and a new Merrill Lynch research report offers the firm’s top ideas in those categories

The report noted this:

As investors focus on alpha opportunities for the remainder of 2019, in this note we publish our analysts’ best ideas for the second half of 2019 within the small and mid (SMID) cap size segment of the US equity market. We focus on Buy-rated stocks of at least $1 billion in market cap (and liquidity no lower than $20 million per day) that fall into a major small or mid cap benchmark (plus one idea from our MLPs team), which our contributing teams consider their best ideas for the second half within their SMID-cap coverage based on upcoming catalysts, expected upside, risk/reward tradeoff, etc.

The Merrill team has 27 top picks, but we screened the group for the larger members with the highest brand and sector recognition. These found five that look like great picks for aggressive growth accounts with a higher degree of risk tolerance.

Diamondback Energy

This top Permian Basin play for more aggressive accounts could be a takeover target. Diamondback Energy Inc. (NASDAQ: FANG) is an independent oil and natural gas company headquartered in Midland, Texas, and focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas.

Diamondback’s activities are primarily focused on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.

Wall Street analysts have noted in the past the company’s top-tier asset base, solid accretive additions and financial discipline, which they think allows for not only continued solid cash flow but could put the company in play as a takeover target. Diamondback continues to drill some of the most economical wells in the United States as efficiencies improve, costs decrease and activity remains in the better regions.

The Merrill price target on the stock is $165, while the Wall Street consensus target is $151.34. The shares closed Friday’s trading at $110.83.

Domino’s Pizza

This stock has been on fire and could break out technically and go even higher. Domino’s Pizza Inc. (NYSE: DPZ) is the number one pizza delivery company in the world, with roughly 13,000 stores in 50 states and more than 70 countries. The company’s system is more than 97% franchised, and 59% of the stores are located internationally.

Domino’s has been benefiting from a steadily growing online/digital ordering mix that currently represents over 50% of domestic orders and has a long runway for growth. Since 2008, more than 80% of the menu offerings are new or significantly revised.

Top Wall Street analysts have cited sustainable drivers that include the company’s strong, consistent price-value relationship; improving franchise unit economics due in part to the proven strategy of “fortressing” markets; and growing scale and digital sophistication.

Merrill has a price target of $305, and that compares with a consensus target of $305.60. The stock closed at $281.40 on Friday.

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