Investing

Merrill Lynch Makes 2 Huge New Additions to US 1 Stock List

Lee Jackson

Published: November 16, 2016 10:10 am

Last Updated: January 12, 2020 5:44 pm

With earnings for the third quarter all but over, and the fourth quarter of 2016 already half done, 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 continuing to trade to 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.

In a recent research note, the analysts at Merrill Lynch make a big move by adding a top consumer goods stock and a life sciences company to the firm’s well-respected US 1 list of stocks to Buy, while removing a utility stock. We cover these new changes, and we also take a look at a couple of the top technology companies in the portfolio.

Danaher

This top life sciences company was added to the US 1 list, and it is a favorite across Wall Street. Danaher Corp. (NYSE: DHR) is now one of the largest and most diversified life sciences companies. Its products include analytical instruments and consumables for life sciences research, diagnostics, dental instruments and consumables, as well as equipment and services used in water quality testing and product identification. The company is known as having leading brands across many verticals, with a strong management team and a record of superior execution.

The Merrill Lynch team had this to say in a research note:

We believe that Danaher is one of the better positioned life sciences diagnostic tools companies following the US election given higher industrial exposure. There are several near-term catalysts and the company has multiple levers to combat uncertainty.

Shareholders are paid a small 0.65% dividend. Merrill Lynch raised its price target for the stock to $93. The Wall Street consensus target is at $88.88. The shares closed Tuesday at $79.63.

Mohawk Industries

This company has benefited from the strong housing market and also was added to the US 1 list. Mohawk Industries Inc. (NYSE: MHK) is a leading building products company, manufacturing and selling flooring products such as carpets, rugs, ceramic tile, wood, stone, luxury vinyl tile and vinyl flooring. The company believes it is the world’s largest flooring company, with operations in 10 countries.

The company recently reported solid earnings, and the Merrill team raised their EBITDA estimates for 2016 to 2018. They also are expecting execution at the company to stay positive, and they think that attractive mergers and acquisition possibilities may present themselves and add even more upside to estimates.

The Merrill Lynch price target is $235, and the consensus target is right in line at $235.17. The shares closed yesterday at $197.16.

NextEra Energy

This top utility was removed from the Merrill Lynch US 1 list, but it remains Buy rated after a very strong run. NextEra Energy Inc. (NYSE: NEE) is a leading clean energy company with consolidated revenues of over $17.0 billion and approximately 44,900 megawatts of generating capacity, which includes megawatts associated with noncontrolling interests related to NextEra Energy Partners.

Headquartered in Juno Beach, Florida, NextEra Energy’s principal subsidiaries are Florida Power & Light Company, which serves approximately 4.8 million customer accounts in Florida and is one of the largest rate-regulated electric utilities in the United States, and NextEra Energy Resources, which, together with its affiliated entities, is the world’s largest generator of renewable energy from the wind and sun.

Investors receive a 3.03% dividend. The $146 Merrill Lynch price objective compares with the consensus target price of $138.14. Shares closed Tuesday at $115.03.

Broadcom

This is the formerly separately Avago and Broadcom and it is one of three tech companies on the prestigious Merrill Lynch US 1 list. Broadcom Ltd. (NASDAQ: AVGO) is a leading designer, developer and global supplier of a broad range of analog and digital semiconductor connectivity solutions. Its extensive product portfolio serves four primary end markets: wired infrastructure, wireless communications, enterprise storage and industrial and other.

Applications for the company’s products in these end markets include data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems and displays.

The company produces radio frequency (RF) front-end for LTE-enabled Apple products. Wall Street estimates that the company does 15% of its total business with Apple. Additional estimates are that Avago has between a 13% and 17% revenue exposure to Apple in the wireless communications segment, which was guided up 10% or so quarter over quarter for the third quarter.

Facebook is expected to use the company’s Tomahawk switching chip in its Voyager project.

Broadcom investors receive a 1.2% dividend. The Merrill Lynch price target is $215, and the consensus target is set at $205.34. Shares closed most recently at $166.45. The company is expected to report earnings on December 7.

Lam Research

This company remains one of the top chip equipment picks across Wall Street. Lam Research Corp. (NASDAQ: LRCX) designs, manufactures, markets, refurbishes and services semiconductor processing equipment used in the fabrication of integrated circuits. The company offers plasma etch products that remove materials from the wafer to create the features and patterns of a device.

Many Wall Street analysts have highlighted the company and its peers as having a significant equipment opportunity from the NAND evolution as well. Lam Research also appears well positioned to gain share in the wafer fab equipment (WFE) market, driven by a strong focus on technology inflection spending over the next few years.

The company reported solid third-quarter results, and Merrill Lynch was very impressed with the solid guidance for the fourth quarter. The analyst also points to the company’s analysts day later this month, when it could announce a $1 billion stock buyback program.

Shareholders are paid a 1.21%. The Merrill Lynch price objective is $115, and the consensus is at $110.89. The shares closed Tuesday at $101.12.

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 additions to any growth portfolio.