[cnxvideo id=”655420″ placement=”ros”]With only two weeks left in 2016, we are starting to turn our attention to 2017, and it will be a year full of change. For the first time in years, a Republican is in the White House and the party also controls both houses of the Congress. In addition, with tax cuts on the horizon, and hopes for an improving economy, the market may have a strong foundation to improve on this year’s gains, and that would be outstanding with the S&P 500 already up over 10% for 2016.
While we are already seeing a slew of top picks for next year, we also wanted to review the high conviction portfolios at the firms we cover here at 24/7 Wall St. for the stocks they have that could be ready to make significant moves in 2017. We screened the Merrill Lynch US 1 list and found five companies that could be poised to outperform in the coming year.
Broadcom
This stock has been on a roll this year and is expected to trade even higher. 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. Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the RF arena. Many on Wall Street see a cyclical rebound in industrial and communications demand.
The analysts noted this recently:
Maintain Buy, a top pick after meeting CFO & Investor Relations in Boston and NY, meetings reinforce confidence in product diversity, free-cash-flow (FCF) returns. Street chasing quarterly volatility of products but missing emerging solid FCF returns story that can attract new investors. Stock trading at a 25% discount to peers on price to FCF basis.
Investors receive a 2.27% dividend, which was recently raised. The Merrill Lynch price target for the stock is $215, and the Wall Street consensus target is $211.68. The stock closed Thursday at $180.01.
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CVS
This top stock has been hit hard this year, down over 25% since May, and it also resides in the UBS dividend ruler portfolio. CVS Health Corp. (NYSE: CVS) provides integrated pharmacy health care services. Its Pharmacy Services segment offers pharmacy benefit management solutions, such as plan design and administration, formulary management.
The Retail/LTC segment sells prescription and over-the-counter drugs, beauty products and cosmetics, personal care products, convenience foods, seasonal merchandise and greeting cards, as well as provides photo finishing services.
The company operates 9,655 retail stores in 49 states, the District of Columbia, Puerto Rico and Brazil, primarily under the CVS Pharmacy, CVS, Longs Drugs, Navarro Discount Pharmacy and Drogaria Onofre names; online retail pharmacy websites; and 32 on-site pharmacy stores, long-term care pharmacy operations and retail health care clinics.
Note that some think Warren Buffett may have his eye on the company.
CVS investors receive a 2.17% dividend. Merrill Lynch has an $89 price objective, and the consensus price target is $86.45. The shares closed Thursday at $78.29.
Delta Air Lines
This company consistently ranks high with Wall Street, and the stock recently was added to the Merrill Lynch US 1 list. Delta Air Lines Inc. (NYSE: DAL) and the regional Delta Connection carriers offer service to 334 destinations in 64 countries on six continents. Headquartered in Atlanta, Delta employs nearly 80,000 employees worldwide and operates a mainline fleet of more than 700 aircraft.
Wall Street analysts have long lauded Delta for the most extensive hedging policy among the airlines, and it owns and operates a refinery in addition to a sizable hedging book. Merrill Lynch notes that while the stock has underperformed this year, if bookings and the economy spike in 2017, the company’s stock multiple stands to benefit the most among the major carriers.
Delta investors are paid a 1.63% dividend. Merrill Lynch recently raised its price objective to $66 from $55. The consensus target price is $55.94, and the stock closed most recently at $50.50.
General Dynamics
This company, like other major defense prime contractors, has had a very solid year, and it also made the Q4 Best Ideas list and the US 1 list. General Dynamics Corp. (NYSE: GD) is a worldwide aerospace and defense company with over 96,000 employees worldwide. The company operates through four business groups: Aerospace, Combat Systems, Marine Systems, and Information Systems and Technology. The U.S. government is its largest customer, which should continue to bode well as the Republicans control both Congress and the White House.
Merrill Lynch team noted late in November:
We continue to view General Dynamics Aerospace segment, which includes Gulfstream, as undervalued. We reiterate our Buy. The company is trading at 16.3x price to earnings multiple on our 2018 estimates vs. the average of pure play defense companies at 19.5x P/E.
Investors are paid a 1.75% dividend. Merrill Lynch has a $200 price target, while the consensus estimate is at $186.06. The stock closed yesterday at $174.12.
Lowe’s
Many on Wall Street feel this company deserves a premium multiple to its peers. Lowe’s Companies Inc. (NYSE: LOW) operates as a home improvement retailer, offering products for maintenance, repair, remodeling and home decorating. Categories include kitchens and appliances; lumber and building materials; tools and hardware; fashion fixtures; rough plumbing and electrical; lawn and garden; seasonal living; paint; home fashions; storage and cleaning; flooring; millwork; and outdoor power equipment. The company also offers installation services through independent contractors in various product categories.
The stock was hit hard during the past quarter, and the analysts at Merrill Lynch note that it is trading at a price-to-earnings discount to its rival Home Depot, as well as trading below its five-year and 10-year P/E averages. With earnings expected to grow at an 18% compounded annual growth rate through 2018, adding shares at current levels makes sense.
Lowe’s investors receive a 1.9% dividend. The Merrill Lynch price objective is $89. The consensus target is $79.71. Shares closed Thursday at $73.67.
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These five solid ideas for 2017 all make good sense for growth portfolios. While the market has rallied a ton since the election, it may make sense to buy partial positions here and see if we don’t back up some next year.
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