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Merrill Lynch Makes Huge Energy Changes to Prestigious US 1 List
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With the first-quarter earnings ready to start rolling out fast and furious next week, 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 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 as the political and world landscape looks to remain unsettled.
In a recent research note, the analysts at Merrill Lynch make a big move by swapping out one top energy stock, Devon Energy Corp. (NYSE: DVN), and adding another, Hess Corp. (NYSE: HES), to the firm’s well-respected US 1 list of stocks to Buy, which is the firm’s highest conviction ideas.
Hess is a top mid/large cap pick that down a stunning 50% since highs printed in 2014. The exploration and production company develops, produces, purchases, transports and sells crude oil, natural gas liquids (NGLs) and natural gas. It primarily operates in the United States, Denmark, Equatorial Guinea, Norway, Malaysia and the Joint Development Area of Malaysia/Thailand.
Merrill Lynch cites the big short interest in the stock, which Wall Street Journal now pegs at 30.64 million shares or 10.9% of the float. The firm also points to the 60 million barrels of oil equivalent per day growth in the second half of 2017, which should drive free cash flow from 2018.
Though Devon was removed from the US 1 list, it remains Buy rated at Merrill Lynch. This independent energy company primarily engages in the exploration, development and production of oil, natural gas and NGLs in the United States and Canada. It operates approximately 19,000 wells, and it also offers midstream energy services, including gathering, transmission, processing, fractionation and marketing to producers of natural gas, NGLs, crude oil and condensate through its natural gas pipelines, plants and treatment facilities.
Hess shareholders are paid a solid 1.97% dividend. The Merrill Lynch price target for the stock is $80, and the Wall Street consensus target is $64.09. Its shares closed Tuesday at $50.76.
Devon investors receive a 0.57% dividend. Merrill Lynch has a $61 price target. The posted consensus target is much lower at $53.74. The stock closed Tuesday at $42.28 per share.
In addition, the following are the three highest yielding stocks in the US 1 portfolio.
This company has had a nice run off lows posted in November but is still trading below levels printed last summer. 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 14.4 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 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 4.86% dividend. The Merrill Lynch price objective is $46, and the consensus target is $43.05. The shares closed most recently at $40.32 apiece.
This company consistently has ranked high with Wall Street. 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. The stock underperformed last year, and if bookings and the economy continue to spike up in 2017, many believe that the company’s multiple stands to benefit the most among the major carriers.
Delta investors are paid a 1.81% dividend. The $64 Merrill Lynch price objective compares with the consensus price objective of $61.43 and the most recent close at $44.98.
This top data center company is a solid play on the huge cloud and streaming content revolution. Digital Realty Trust Inc. (NYSE: DLR) supports the data center and colocation strategies of more than 600 firms across its secure, network-rich portfolio of data centers located throughout North America, Europe, Asia and Australia.
Its clients include domestic and international companies of all sizes, ranging from financial services, cloud and information technology services, to manufacturing, energy, gaming, life sciences and consumer products. The company rates highly with portfolio managers, as 8.39% of its market cap is in institutional hands.
The analysts cite the solid dividend and the potential for dividend growth. They also feel that data center pricing is still favorable, and the growth in adoption of the cloud is a positive going forward. Lastly, they feel the stock is underweighted by active managers and could see an uptick if they started adding shares.
Digital Realty investors are paid a very rich 3.41% distribution. Merrill Lynch has a huge $120 price target. The consensus target is $108.94, and the shares closed most recently at $109.16.
The US 1 list has outperformed the S&P 500 since inception by a large margin. The stocks in the portfolio are among the highest conviction picks at Merrill Lynch and make good additions to any growth portfolio.
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