Investing

5 Cheap Stocks to Buy From Merrill Lynch's Focus List for a Very Expensive Market

Lee Jackson

Published: January 27, 2017 8:40 am

Last Updated: January 12, 2020 3:27 pm

In the euphoria of the long-awaited push through the 20,000 level on the Dow Jones Industrial Average, there is a potential train-wreck waiting to happen, and investors need to be careful. While there is no question that the new positions of the Trump administration, specifically tax reform and lower corporate tax rates, will prove to be positive, they won’t be implemented tomorrow. With interest rates going higher and the market way overbought, caution is key.

We screened the Merrill Lynch US 1 list, which is a portfolio of the firm’s highest conviction ideas, for stocks that have not made parabolic moves higher and still offer investors solid value at current levels. We found five that make good sense now, and they all are rated Buy.

AT&T

This company has had an incredible run last year but is off almost 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.

AT&T has several major catalysts likely to drive strong network traffic demand: DirecTV Now and Mobile, “Data-Free TV” for DirecTV/U-Verse subscribers and increasing penetration of unlimited data plans. Many on Wall Street believe that the company is well-positioned to address ongoing traffic requirements, with additional LTE capacity available and the ability to leverage small cell deployments.

The company posted fourth-quarter adjusted earnings per share in line with analyst expectations, though its revenue fell short of Thomson Reuters consensus estimates and also was a slight drop from sales during the year-earlier quarter.

AT&T investors are paid a huge 4.7% dividend. The Merrill Lynch price objective is for the stock is $46. The Wall Street consensus target price is $41.55. Shares closed Thursday at $41.77.

Allergan

This remains a very large hedge fund holding and is down a stunning 30% or so from highs printed in July of 2015. Allergan Inc. (NYSE: AGN) develops, manufactures and markets branded pharmaceutical products. Its growth has been driven largely by acquisitions supported by internal growth, with significant acquisitions of the “old” Allergan, Forest and Warner-Chilcott.

Allergan markets a portfolio of best-in-class products that provide valuable treatments for the central nervous system, eye care, medical aesthetics, gastroenterology, women’s health, urology, cardiovascular and anti-infective therapeutic categories, and it operates the world’s third-largest global generics business, providing patients around the globe with increased access to affordable, high-quality medicines.

Allergan is an industry leader in research and development, with one of the broadest development pipelines in the pharmaceutical industry and a leading position in the submission of generic product applications globally. Note that the stock was hammered after a deal with Pfizer fell through last spring.

Investors in Allergan are paid a 1.33% dividend. The $280 Merrill Lynch price target compares with a consensus target that is listed at $260.79. The shares closed most recently at $210.80.

American Express

This stock has had a solid year, but it is still down 20% from highs printed in 2014. American Express Co (NYSE: AXP) provides charge and credit payment card products and travel-related services to consumers and businesses worldwide.

The company’s products and services include charge and credit card products; payments and expense management products and services; consumer and business travel services; stored value products, such as traveler’s checks and other prepaid products; and network services.

American Express shareholders are paid a 1.66% dividend. Merrill Lynch has set its price target at $90, and the consensus target is lower at $80.16. The stock closed most recently at $76.93 a share.

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 are paid a 1.91% dividend. Merrill Lynch has an $89 price objective on the shares, and the consensus price target is $81.20. Shares closed most recently at $73.23.

Newell Brands

This top consumer goods stock may be offering investors an outstanding value at current levels. Newell Brands Inc. (NYSE: NWL) is a manufacturer and marketer of consumer products has six reporting segments, including the recently acquired Jarden. They are: Writing (Sharpie, Paper Mate, Waterman, Parker), Home Solutions (Rubbermaid, Calphalon, Goody), Tools (Irwin, Lenox), Commercial Products (Rubbermaid Commercial Products, Rubbermaid Healthcare), Baby & Parenting (Graco, Aprica) and Jarden (with 120 brands including Yankee Candle, Jostens, Oster, Sunbeam, Mr. Coffee, K2, Marmot, Rawlings, Coleman and First Alert).

The stock is down about 15% from its mid-August highs, and third-quarter results were soft, but the analyst believes value triggers remain underappreciated, with a likely sales acceleration. Top analysts see upside from cost synergies, more acquisitions and portfolio rationalization that could drive operating margins and the multiple. The company is expected to report fourth-quarter results in early February.

Investors are paid a 1.64% dividend. The $55 Merrill Lynch price target is less than the posted consensus price objective of $57.31. The shares closed most recently at $46.35.

None of these stocks is a momentum giant, but they all offer investors solid value in a market that not only could use a breather, but really could use a healthy correction. All make sense for longer term growth accounts.