Investing

Merrill Lynch Has 5 Blue Chips That Lagged This Year to Buy for 2016

Lee Jackson

Published: December 3, 2015 11:05 am

Last Updated: January 13, 2020 4:31 pm

Owning stocks this year has been a rocky ride that included a sharp sell-off in August and a retest of the lows in September. Despite the roller-coaster ride, the markets are anticipating a potential year-end rally, and some top companies that have lagged this year may end up being 2016 winners. A Merrill Lynch new report notes that despite the up and down year, stocks remain the place to be going forward.

Merrill Lynch strategist Savita Subramanian notes that much of the gains eked out this year are from momentum stocks, and the tide could finally be turning for the value arena. In fact, the firm feels we could be in the early innings of a value run, given the biggest driver for value outperformance has been a pickup in profit growth.

The report also focuses in on five top stocks, all rated Buy at Merrill Lynch, that underperformed this year. The five were the bottom contributors to the S&P 500 total return in percentage points. They also could be five companies that outperform in 2016.

Cisco

This is one of the top mega-cap technology stock picks on Wall Street and perhaps a surprising defensive pick for volatile markets like we have witnessed. Cisco Systems Inc. (NASDAQ: CSCO) posted disappointing earnings in November, and many on Wall Street have lowered the price target for the networking giant significantly. Cisco is also one of the 24/7 Wall St. top 10 stocks to own for the next decade.

Analysts across Wall Street point to an estimated double-digit bookings momentum for Cisco’s Meraki Cloud Services. Many think that Meraki is likely to be a $1 billion plus run-rate business this year, with an incredible 50% to 70% compounded annual growth rate. A jump from 40 GE to 100 GE data center switching and next generation security are also adding to the total sales profile and product mix.

Cisco investors receive a very solid 3.05% dividend. The Merrill Lynch price target for the stock is $30, and the Thomson/First Call consensus target is $30.36. The shares closed most recently at $27.44.

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Celgene

This is a Merrill Lynch top biotech pick that they feel has solid upside potential for 2016. Celgene Corp. (NASDAQ: CELG) has an outstanding partnered pipeline, which most think is low risk and has the potential to yield several blockbuster drugs. Certain Wall Street analysts also think the company can grow earnings 15% on a compounded annual growth rate basis going forward.

Celgene provided strong guidance earlier this year surrounding its Otezla launch and encouraging feedback from doctors on the potential of new triplet regimens in myeloma. Analysts across Wall Street have raised their estimates for the drug as, after a little more than a year on the market, Otezla, which treats psoriasis and psoriatic arthritis, has achieved considerable prescriptions among physicians.

Celgene’s blockbuster blood cancer drug Revlimid continues to dominate. Pomalyst sales also continue to be solid. Cancer drug Abraxane is also growing at a respectable rate, so the company continues to have a strong lineup of top-selling drugs. While third-quarter numbers were pretty much just in line, fourth quarter and 2016 could prove to be better.

The $155 Merrill Lynch price target is higher than the consensus target of $145. The shares closed Wednesday at $111.43.

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Kinder Morgan

This is one of the most recommended stocks in the master limited partner (MLP) sector, but it has been absolutely mauled this year and is the worst-performing pipeline stock in the S&P 500. Kinder Morgan Inc. (NYSE: KMI) has completed the acquisition of Kinder Morgan Energy Partners, Kinder Morgan Management and El Paso Pipeline Partners. The merger plan was comprised of $40 billion in parent-company equity, $4 billion in cash and $27 billion in assumed debt. It was a move some shareholders were opposed to, but one many on Wall Street saw as brilliant.

The stock took a shot this week when Moody’s Investors Service lowered its outlook to negative and said Kinder Morgan’s debt is flirting with junk status. This may just the time for aggressive accounts to look hard at this mammoth industry leader.

Shareholders receive a massive 9.1% distribution. Merrill Lynch has a $42 price target, and the consensus target is $36.94. Shares closed Wednesday at $20.66.

Priceline

This Internet travel leader has been a big 2015 second half laggard. Priceline Group Inc. (NASDAQ: PCLN) operates Booking.com, which provides online accommodation reservation services, and Priceline.com, which offers hotel, rental car and airline ticket reservations services, as well as vacation packages and cruises through its Name Your Own Price and Express Deals travel services. It also operates Agoda.com, an online accommodation reservation service for consumers in the Asia-Pacific region, and RentalCars.com, which offers car rental reservation services.

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Trading at 18.6 times fiscal year 2016 earnings, the travel giant is seen by many Wall Street analysts as an “open-ended” growth story. Many continue to see comparisons easing for international bookings and margins will improve in the second half of the year and into 2016. Expectations for a pickup in European consumer spending remain positive, while the company’s dominant market share has helped it to fend off competitive threats.

The Merrill Lynch price target of $1,500 compares to a consensus at $1,492.92. The shares closed on Wednesday at $1275.44.

Qualcomm

This top technology stock has totally underperformed this year but is still a Wall Street favorite and a member of the Merrill Lynch US 1 list. Many analysts are sticking to their guns on Qualcomm Inc. (NASDAQ: QCOM), basically saying that trading at current levels — the stock is at 12.6 times estimated 2016 earnings — it may be a tremendous long-term value. Qualcomm is a quality tech company with recurring royalty revenue and a strong footprint, so patient investors may fare very well.

The company is reported to be losing chip business, and activist investor Jana Partners has been pressuring the company to spin off its chip business for some time. Jana also wants Qualcomm to continue to cut costs, accelerate a share buyback, improve disclosures and refresh its board, which it accomplished when two new directors were added last summer. Jana is listed as one of the company’s largest shareholders, with a reported $2 billion stake.

The growth of 3G mobile technologies in emerging markets, like China and India, has positively impacted Qualcomm and could be a difference maker going forward. Qualcomm is and has been for years a market leader in the development of 3G CDMA (Code Division Multiple Access) technologies. The company recently developed an LTE chipset that supports SCDMA (Synchronous Code Division Multiple Access) technology. China’s mobile network runs on this, and it could provide the company with a huge leg up in years to come. The company signed a big licensing deal recently in China that gave the stock a boost.

Qualcomm investors receive a 3.7% dividend. Merrill Lynch has a mammoth $75 price target, and the consensus estimate is lower at $64.15. Shares closed Wednesday at $51.85.

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These are hardly value traps. They are top growth companies that hit bumps in the road over the past year. Patient growth investors with a degree of risk tolerance could achieve outstanding long-term gains buying shares now.