With third-quarter earnings reporting winding down, and the fourth quarter of 2019 well underway, many of the top companies we follow on Wall Street are tweaking the lists of their high-conviction stock picks for clients. With the market showing the ability to push the indexes to record highs, it makes sense to examine the lists and make some changes as the rest of this year and 2020 could have added volatility as the political and geopolitical cycle could prove to be very explosive components.
Many on Wall Street feel that value stocks could outperform growth stocks for the next year. We decided to screen the Merrill Lynch US 1 list of top picks, looking for stocks that while not true value plays, have some value characteristics, which typically include solid fundamentals that are priced below those of its peers, based on analysis of price-to-earnings ratio, yield and other factors.
We found three stocks that could be incredibly strong additions to portfolios for 2020. Of course, due to their inclusion on the firm’s US 1 list, they all are rated Buy, and most importantly, they could be at the minimum shadow value plays for next year.
Merrill’s bank team has remained very positive on this company, and the was added to the US 1 list back in the summer. BB&T Corp. (NYSE: BBT) is a Winston-Salem, North Carolina–based financial services company with more than $200 billion in assets. With a history dating back to the Civil War, it is currently the ninth-largest bank in the United States by deposits and sixth largest by number of branches.
Building on a long tradition of excellence in community banking, BB&T offers a wide range of financial services including retail and commercial banking, investments, insurance, wealth management, asset management, mortgage, corporate banking, capital markets and specialized lending. The company operates over 2,100 financial centers in 15 states and Washington, D.C.
The recent announcement of the merger between BB&T and SunTrust took Wall Street by storm, and when completed it will make the combined company the sixth-largest U.S. bank. It will be rechristened Trust Bank once the merger of the two companies is completed. The deal was announced in February and valued at $66 billion, and the bank will serve more than 10 million U.S. households.
Investors receive a 3.28% dividend. The Merrill price target for the shares is $55, and the Wall Street consensus target is $56.11. The shares closed Friday’s trading at $54.94.
This is a solid value play in the health care sector. Cigna Corp. (NYSE: CI) is a major health services organization that provides insurance and related products and services in the United States and internationally. All products and services are provided exclusively by or through operating subsidiaries of Cigna, including Cigna Health and Life Insurance Company, Life Insurance Company of North America, Cigna Life Insurance Company of Canada and their affiliates.
The health care giant offers an integrated suite of health services, such as medical, dental, behavioral health, pharmacy, vision, supplemental benefits and other related products, including group life, accident and disability insurance. Cigna maintains sales capability in 30 countries and jurisdictions, and it has approximately 86 million customer relationships throughout the world.
The company posted solid third-quarter results, and Merrill said this:
The company delivered the third beat & raise for the year, as revenues and the Medical Loss Ratio beat street expectations. The pharmacy benefit manager segment beat consensus estimates, and pivoted the segment to year over year growth, removing an overhang on the stock. 2020 guidance looks conservative on core growth, with capital deployment upside.
Merrill has a $258 price target, and the consensus target is $215.69. The shares closed at $188.20 on Friday.
This is a top Permian Basin play for more aggressive accounts, and it could be a takeover target. Diamondback Energy Inc. (NASDAQ: FANG) is a pure-play Permian producer with 344,000 proforma net acres in the Midland and Delaware Basins with mineral rights ownership on certain acreage held indirectly through Viper Energy. The majority of acreage sits in contiguous blocks in Midland, Glasscock, Howard Martin/Andrews counties in Midland and in Reeves, Pecos and Ward counties on the southern Delaware side.
Wall Street analysts have noted in the past Diamondback Energy’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. It 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 stock was hit hard after so-so third-quarter results, but at less than 11 times earnings, it looks solid. The analysts said this:
As expected sloppy third quarter results with weaker oil cut (65%); guide for 2019 (66-67%)/2020 (66%) is roughly 1.5% below expectations. Prudent 2020 guidance: flattish capex with oil production up 10-15%; Peer-leading sustaining capex $1.7 billion (50% of annual CF) Lowering 2019/2020 EBITDA estimates by 5.2%/5.9%.
The $151 Merrill price target is well above the $132.24 consensus figure and the most recent close at $75.43.
The S&P 500 is up a stunning 23% year to date, and by almost all metrics, the major indexes are very expensive. That said, the decade-long bond market rally, especially in the U.S Treasury market, looks finally to be close to over. As those selling and taking big profits have to redeploy somewhere, stocks with value traits that are top picks may be well worth a look.
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