Investing

Merrill Lynch Makes Big Changes to Top-Performing Growth Portfolio

Lee Jackson

Published: May 7, 2018 8:29 am

Last Updated: January 12, 2020 12:00 am

With earnings reporting for the first quarter all but over, and the second quarter of 2018 well underway, 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 showing volatility not seen in years, 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 geopolitical cycle could prove to be a very explosive component.

In a recent research note, the analysts at Merrill Lynch make a big move by adding Netflix and D.R. Horton to the firm’s Growth 10 portfolio. They replace Andeavor and Affiliated Managers Group. Over the past 10 years, the portfolio has outperformed the S&P 500 Growth benchmark by 249.2% to 177.5%.

Here are the 10 stocks that now make up the Merrill Lynch Growth 10 portfolio. Of course, all are rated Buy at Merrill Lynch.

Amazon

This absolute leader in online retail and dominant player in cloud storage business remains the top pick on Wall Street. Amazon.com Inc. (NASDAQ: AMZN) serves consumers through retail websites that primarily include merchandise and content purchased for resale from vendors and those offered by third-party sellers.

The company serves developers and enterprises through Amazon Web Services, which provides computing, storage, database, analytics, applications and deployment services that enable virtually various businesses. AWS is also the undisputed leader in the cloud now, and many top analysts see the company expanding and moving up the enterprise information value chain and targeting a larger total addressable market.

The Merrill Lynch price target for the shares is $1,840, and the Wall Street consensus target is $1,820.20. The stock closed Friday at $1,580.95 a share.

D.R. Horton

This is one of the highest volume builders in the United States and a top pick at Merrill Lynch, also residing in the firm’s US 1 list. D.R. Horton Inc. (NYSE: DHI) is the largest public builder by closings in the country and is positioned in 78 metropolitan markets in six major regions. It develops single-family homes primarily for first-time and move-up buyers.

Approximately 80% of revenue is derived from the Southeast, South Central and West regions, all of which continue to see very solid growth. D.R. Horton also provides mortgage financing and title agency services to homebuyer.

Shareholders receive a 1.12% dividend. Merrill Lynch has a $74 price target, and the consensus target is $56.10. Shares closed Friday at $44.71.

Facebook

The huge social media leader has been volatile recently after the disclosure of user data being compromised, but absolutely blew out earnings. Facebook Inc. (NASDAQ: FB) operates the largest social network, with over 2.0 billion monthly active users and over 1.4 billion daily active users. The company generates revenue from advertising and from payments, with over 95% of revenue from advertising. It generates close to 50% of revenues in the United States and Canada and is expanding rapidly in international markets.

Its solutions also include Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application for mobile and web on various platforms and devices, which enable people to reach others instantly, as well as enable businesses to engage with customers; and WhatsApp Messenger, a mobile messaging application.

A stunning 88.7% of fund managers have the social media giant in their portfolios, and despite the recent issues, there is no reason to think many will be selling all their shares.

The $215 Merrill Lynch price target is less than the $216.06 consensus price target. Shares closed on Friday at $176.71.

Flowserve

This company should get a boost from an improving economy and the proposed infrastructure build. Flowserve, Corp. (NYSE: FLS) is a Texas-based supplier of pumps, valves, seals, automation and related services, primarily for the oil and gas, power and chemical industries. Flowserve operates under three segments: Engineered Products, Industrial Products and Flow Control.

The stock has stumbled some over its past few earnings reports, but the analysts note that bookings were strong as 2017 ended and the prospects look good for this year.

Investors receive a 1.74% dividend. Merrill Lynch has set its price target at $57. The consensus target is $45.69, and shares closed Friday at $45.74.

Alphabet

The search giant continues to expand and is even working on a driverless car now. Alphabet Inc. (NASDAQ: GOOGL) is a global technology company focused on key areas, such as search, advertising, operating systems and platforms, enterprise and hardware products. It generates revenue primarily by delivering online advertising and by selling apps and contents on Google Play, as well as hardware products. The company provides its products and services in more than 100 languages and in 190 countries, regions and territories.

Alphabet offers performance and brand advertising services. It operates through Google and Other Bets segments. The Google segment includes principal internet products, such as Search, Ads, Commerce, Maps, YouTube, Apps, Cloud, Android, Chrome and Google Play, as well as technical infrastructure and newer efforts, such as virtual reality.

Some 63.4% of the managers said they own the stock, which has rolled over some since the most recently reported earnings.

The Merrill Lynch price target is $1,270. The consensus estimate is $1,275.12, and shares closed Friday at $1,051.

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Netflix

This Wall Street darling and FANG constituent could offer solid upside. Netflix Inc. (NASDAQ: NFLX) is the world’s leading internet television network, with more than 70 million members in over 190 countries enjoying more than 125 million hours of TV shows and movies per day, including original series, documentaries and feature films. Members can watch as much as they want, anytime, anywhere, on nearly any internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments.

Netflix is available on virtually any device with an internet connection, including personal computers, tablets, smartphones, smart TVs and game consoles, and it automatically provides the best possible streaming quality based on available bandwidth. Many titles, including Netflix original series and films, are available in high-definition with Dolby Digital Plus 5.1 surround sound and some in Ultra HD 4K. Advanced recommendation technologies with up to five user profiles help members discover entertainment they’ll love.

The $347 Merrill Lynch price target compares with a consensus target of $333.12. Shares closed Friday at $320.08.

NRG

This stock has made a nice run off the lows, but it may hold solid upside for aggressive accounts. NRG Energy Inc. (NYSE: NRG) is an integrated independent power producer that owns and operates 27 gigawatts (GW) of conventional and renewable generating capacity in the United States and serves 3 million retail customers in Texas and the Northeast.

NRG derives revenue from the sale of electricity in the wholesale and retail markets and the sale of capacity. The company also owns a 64.5% interest in NRG Yield, a publicly traded, dividend growth-oriented company that owns 5 GW of long-term contracted renewable assets.

NRG investors receive a 0.36% dividend. Merrill Lynch has a $35 price target. The consensus target is $36.50, and shares closed Friday at $33.30.

PulteGroup

This top homebuilder has a wide product portfolio. PulteGroup Inc. (NYSE: PHM) is one of the largest public homebuilders in the United States, delivering over 21,000 homes in 2017. The company is also well-positioned in approximately 50 markets in 26 states, targeting the first-time, move-up and active adult buyer groups.

PulteGroup primarily builds single-family detached homes, although it also constructs townhouses, condominiums and duplexes. The company owns a captive financial services business that provides mortgage financing, title, insurance and closing services.

Pulte Homes investors are paid a 1.17% dividend. Merrill Lynch has set its price objective at $44, while the posted consensus target price for the shares is $35.82. The stock closed Friday’s trading at $30.98 per share.

United Rentals

This stock has rallied smartly but still has solid upside potential, and it is also on the Merrill Lynch US 1 list. United Rentals Inc. (NYSE: URI) is the largest equipment rental company in the world. The company has an integrated network of 876 rental locations in 49 states and 10 Canadian provinces.

With approximately 12,200 employees, the company serves construction and industrial customers, utilities, municipalities, homeowners and others. It offers for rent approximately 3,100 classes of equipment for rent.

The Merrill Lynch price target for the shares is $186, and the Wall Street estimate was last seen at $180.29. The stock closed trading at $153.23 on Friday.

Zoetis

This is a big player in the veterinarian world. Zoetis Inc. (NYSE: ZTS) engages in the discovery, development, manufacture and commercialization of animal health medicines and vaccines for livestock and companion animals in the United States and internationally.

The company offers anti-infectives that prevent, kill or slow the growth of bacteria, fungi, or protozoa; vaccines, which are biological preparations to prevent diseases of the respiratory, gastrointestinal and reproductive tracts or induce a specific immune response; and parasiticides that prevent or eliminate external and internal parasites, such as fleas, ticks and worms.

It also provides medicated feed additives that offer medicines to livestock; veterinarian solutions for anesthesia, pain management and the diagnosis of diabetes; and other pharmaceutical products, including pain and sedation, oncology, antiemetic, allergy and dermatology, and reproductive products. In addition, it offers other product categories comprising nutritionals and agribusiness services, as well as products and services in complementary areas consisting of biodevices, diagnostics and genetics.

Shareholders are paid just a 0.62% dividend. The $97 Merrill Lynch price target is well above the posted consensus target of $86.50. The shares closed Friday at $81.56 apiece.

These 10 solid growth ideas are all in one portfolio at Merrill Lynch. They are good stocks for investors who have a long-term holding view and those looking for companies that are somewhat dominant in their specific sectors.