With earnings for the third quarter all but over, and the fourth quarter of 2016 in full swing, many of the top companies we follow on Wall Street are making some changes to the lists of their high conviction stock picks for clients. With the market recently trading near all-time highs, it makes sense to examine the lists and make some changes as the rest of the year could have additional volatility. While the political cycle should quiet down with the election over, rising interest rates could prove to be very volatile component.
The analysts at Merrill Lynch have made a big move by adding a top property and casualty company to the firm’s well-respected US 1 list of stocks to Buy. XL Group Ltd. (NYSE: XL) operates as an insurance and reinsurance company. It provides property, casualty and specialty products to industrial, commercial, professional and insurance companies, as well as other enterprises worldwide.
The company operates in two segments. The Insurance segment offers casualty programs comprising primary and excess casualty, environmental liability, excess and surplus lines, construction and surety insurance products, as well as property programs; professional lines, such as directors, officers, errors and omissions, employment practices, crime, fiduciary, technology and cyber liability coverages; and specialty lines, including the aviation and satellite, marine, fine art and specie, equine, livestock and aquaculture, crisis management, political risk, trade credit and life, and accident and health products.
The Reinsurance segment provides casualty reinsurance products, including general and professional liability, and automobile and workers compensation; property reinsurance products comprising property catastrophe, property risk excess of loss and property proportional; property catastrophe; specialty reinsurance products, such as energy, marine, aviation and space; and other reinsurance products, including fidelity, surety, trade credit, accident and health, mortgage and political risk.
Merrill Lynch sees the stock as an attractive value play and cites future return on equity improvement being discounted by the market. The analyst also expects lower integration costs, realization of cost savings and ongoing active capital management to drive the expected return on equity improvement.
Investors receive a 2.25% dividend. The Merrill Lynch price objective for the stock is $44, and the Wall Street consensus target is $39.92. Shares traded Wednesday morning at $36.20.
In addition, we also screened the list for the top dividend companies in the portfolio.
AT&T
This company has had an incredible run this year but is off over 10% in less than six weeks. AT&T Inc. (NYSE: T) is the world’s largest provider of pay TV, with TV customers in the United States and 11 Latin American countries. In the United States, the AT&T wireless network has the nation’s self-described strongest 4G LTE signal and most reliable 4G LTE. The company also helps businesses worldwide serve their customers better with mobility and highly secure cloud solutions.
With its shares trading at a very cheap 14.3 times estimated 2016 earnings, the company continues to expand its user base, and strong product introductions from smartphone vendors have not only driven traffic but increased device financing plans.
The company recently announced a deal to Buy Time Warner for about $80 billion, which translates to about $110 per share. Two years ago, Time Warner rebuffed a takeover bid from 21st Century Fox at $85 per share. The stock was hammered on the announcement, after already being knocked down as the fear of rising rates hit the telecoms, but is rebounding and offers investors a great entry point with an outstanding dividend.
AT&T investors receive a 5.3% dividend. The Merrill Lynch price target is $46. The consensus price objective is $41.23, and shares traded Wednesday morning at $37.30.
Eli Lilly
This is another company with substantial 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.
The company posted third-quarter sales and earnings well below Wall Street’s expectations, prompting shares to plummet to a four-month low before rebounding. The stock is down almost 10% on the year and offering investors an outstanding entry point. Top analysts on Wall Street are still very focused on the company’s outstanding late-stage product pipeline, which they and others on Wall Street view as very undervalued.
Shareholders receive a 2.76% dividend. The $105 Merrill Lynch price objective compares with the consensus price target of $97.05. Shares traded Wednesday morning at $77.15.
MetLife
This top insurance company pays very solid dividends. MetLife Inc. (NYSE: MET) is one of the largest U.S. life insurers and has become a significant global player. The company provides life insurance, annuities, employee benefits and asset management products in the United States, Japan, Latin America, Asia, Europe and the Middle East.
Merrill Lynch sees one-third of earnings from international, 30% from Group Benefits and Retirement, 20% from the to-be-split Brighthouse entity, and 15% in runoff from legacy retail life and annuity products.
MetLife investors receive a 3.34% dividend. Merrill Lynch has a $55 price target, and the consensus target is $50.77. The shares traded on Wednesday morning at $49.75.
Qualcomm
This top technology stock has done very well this year. Qualcomm Inc. (NASDAQ: QCOM) is a world leader in 3G, 4G and next-generation wireless technologies. The company includes the licensing business, QTL, and the vast majority of its patent portfolio. Its subsidiary Qualcomm Technologies operates substantially all of Qualcomm’s engineering, research and development functions, as well as substantially all of its products and services businesses, including its semiconductor business, QCT.
Qualcomm reported third-quarter revenue and earnings that beat Wall Street estimates. Fourth-quarter guidance was also better than expected. In China, new semiconductor products are gaining share and management is making better progress with royalty collections.
The analysts are bullish on the company’s acquisition of NXP Semiconductors, which Qualcomm is buying in an all-cash deal at $110 per share. The deal is expected to close at the end of 2017 and should be immediately accretive to earnings. The merger brings together complementary products for mobile, automotive, Internet of Things and networking applications.
Investors receive a 3.11% dividend. The Merrill Lynch price objective is set at $76. The consensus target is $73.10. Shares traded at $67.05 Wednesday morning.
While the US 1 list has slightly underperformed the S&P 500 year to date, it has outperformed since inception by a large margin. The stocks are among the highest conviction picks at Merrill Lynch and make good addition to any growth portfolio.
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