Investing

Why Q1 S&P 500 Winners May Be the Best Q2 Bets as Well

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For those in the investing world, the month of March seemed like a whole year, closely resembling the length of January after the holidays each year. With the S&P 500 down an even 20%, and the constant 24/7-365 news cycle tsunami hitting investors each and every day, only 30 stocks out of the entire venerable index were up for the quarter.

Many of the stocks that made it relatively unscathed through the quarter are the logical candidates, especially the consumer stocks. What caught our eye were the companies that could follow up that first-quarter success, with another victory for shareholders in the second quarter. We screened the 30 stocks by sector that ended the quarter in the green against the Merrill Lynch research coverage universe for those rated Buy. We found five that could very well turn in a commiserate performance as we head into the second quarter.

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Activision Blizzard

This remains a top gaming pick on Wall Street and the Merrill team is still positive on the shares. Activision Blizzard, Inc. (NASDAQ: ATVI) develops and publishes online, personal computer (PC), video game console, handheld, mobile and tablet games worldwide.

Activision Blizzard develops and publishes interactive entertainment software products through retail channels or digital downloads and downloadable content to a range of gamers. The company’s legacy franchise Call of Duty game continues to be hugely popular. The analysts said this when discussing its prospects:

The new Call of Duty Modern Warfare 2 remake includes remastered single-player campaign mode, but no online multiplayer. We expect low to mid-single digit millions of units based on sales performance of past remakes with revenues and earnings per share of $70 million and $0.06. Launch not financially significant as game included in guidance for “several remastered and re-imagined experiences” in 2020.

Investors receive just a 0.70% dividend. Merrill has a $70 price target for the shares, while the Wall Street consensus target is at $68.89. Activision Blizzard stock ended the week at $59.98 a share.

Amazon

This is the absolute leader in online shopping and is on the Merrill Lynch US 1 list of top stock picks. Amazon.com Inc. (NASDAQ: AMZN) serves consumers through retail websites that primarily include merchandise and content purchased for resale from vendors and those offered by third-party sellers. It has one of the most valuable brands in the world.

The company serves developers and enterprises through Amazon Web Services, which provides computing, storage, database, analytics, applications and deployment services that enable virtually various businesses. AWS is also the undisputed leader in the cloud now, and many top analysts see the company expanding and moving up the enterprise information value chain and targeting a larger total addressable market.

The company is also rolling out its checkout-free Go technology in a large grocery store and plans to license the cashierless system to other retailers. Amazon Go Grocery opened in Seattle on Tuesday. It uses an array of cameras, shelf sensors and software to allow shoppers to pick up items as varied as organic produce and wine and walk out without stopping to pay or scan merchandise. Accounts are automatically charged through a smartphone app once shoppers leave the store.

The Merrill target price is a whopping $2,480, and the consensus target is $2,409.78. Amazon.com stock closed at $1,906.59 on Friday.

Eli Lilly

This is another company with solid upside potential. Eli Lilly and Co. (NYSE: LLY) is a global health care company with numerous core products in a number of primary-care pharmaceutical markets. The company generates revenues from its pharmaceutical product and animal health segments.

The product portfolio includes Zyprexa (for schizophrenia and bipolar disorder), Gemzar (pancreatic cancer), Evista (osteoporosis), Cymbalta (depression), Cialis (erectile dysfunction), Strattera (attention deficit hyperactivity disorder), Erbitux (cancer) and Alimta (chemotherapy). Eli Lilly also has a strong presence in the diabetes market.

Eli Lilly results came in strong for the fourth quarter, and the Merrill analysts said this at the time:

With a strong close to 2019, Lilly’s industry-leading top- and bottom-line growth appears on track to continue in 2020. 2020 is shaping up to be a big year of clinical and regulatory catalysts across all of Lilly’s core franchises. Discontinuation of pegilodecakin, while a disappointment for Lilly’s oncology franchise, was already removed from our model.

Shareholders receive a 2.07% dividend. The $155 Merrill price objective compares with the $146.21 consensus target. Eli Lilly stock closed on Friday at $139.66.

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Microsoft

This legacy technology giant has a massive $133.8 billion sitting on the balance sheet. Microsoft Inc. (NASDAQ: MSFT) manufactures, licenses, and supports a wide range of software products. The company has transformed its business model from a component driven model (PC, server) to one driven by the need for cloud capacity.

Many Wall Street analysts agree that Microsoft has become a clear number two in the public or hyper-scale cloud infrastructure market with Azure, which is the company’s cloud computing platform offering that continues growing at massive levels. Many have flagged Azure as the biggest rival to Amazon’s AWS service.

Microsoft reported strong fiscal second-quarter results across the board, with Azure accelerating to an impressive 64% year over year growth rate compared with 63% in the prior quarter. Total revenue growth was 15%, and management guided double-digit revenue growth and 2% of operating margin expansion in fiscal 2020. The analysts see strong visibility into double-digit percentage revenue growth, supported by multiple drivers and secular trends for the foreseeable future.

Shareholders receive a 1.5% dividend. Merrill has set a $200 price target. The consensus price objective is $189.10, and Microsoft stock closed most recently at $153.83.

Netflix

This Wall Street darling and FANG constituent offers a great entry point, even after a rally off the sell-off weakness. Netflix Inc. (NASDAQ: NFLX) is the world’s leading internet television network, with more than 120 million members in over 190 countries enjoying more than 125 million hours of TV shows and movies per day, including original series, documentaries and feature films.

Members can watch as much as they want, anytime, anywhere, on nearly any internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments. Netflix is available on virtually any device with an internet connection, including personal computers, tablets, smartphones, smart TVs and game consoles, and it automatically provides the best possible streaming quality based on the available bandwidth.

Many of its titles, including Netflix original series and films, are available in high-definition with Dolby Digital Plus 5.1 surround sound and some in Ultra HD 4K. Advanced recommendation technologies with up to five user profiles help members discover entertainment they will love.

With the stay-at-home edict now firmly in place, it’s obvious the company is positioned well. Merrill analysts noted this:

We walked through potential impacts to Netflix fundamentals from changing consumer behavior on lockdown/stay-at-home orders. We see potential upside to first half subscribers on surging engagement. Margins and free cash flow may get a boost from less advertising and production spending. Netflix’s subscription model is appealing in recession uncertainty and we see investors applauding an upfront jump in subscribers.

The Merrill price target is $426. The consensus figure is $369.74, just above Friday’s close at $361.76 a share.

These five stocks were actually up in what was the worst quarter for stocks in years. While that performance is no guarantee for this quarter, the odds are solidly stacked in the right direction. These top companies all make sense for aggressive growth accounts looking for ideas without a huge level of risk.

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