It’s hard to believe the first half of 2018 already has ended. It’s also hard to imagine that the Dow Jones industrials and S&P 500 have done very little in 2018 after all the volatility has shaken the U.S. equity markets higher and lower this year. Investors have had to rethink their “buy the dip” mentality in 2018 as the trend of the past five years has just been less reliable. Now many investors are wondering how they want to be positioned for the third and fourth quarters in 2018 and beyond.
Merrill Lynch released its high-conviction ideas for the third quarter ahead of the 4th of July holiday. These high-conviction ideas are based on the firm’s views of potential significant market and business-related catalysts that are likely to affect these stocks during the third quarter of 2018. Of the top 10, there were eight buys, spread across six sectors.
24/7 Wall St. has outlined the basics of each case for upside laid out by Merrill Lynch. The calls have been compared to the consensus analyst price targets (mean) from Thomson Reuters for a relative comparison against other research reports and valuations out there.
Allergan
Allergan PLC (NYSE: AGN) led the list, and the pre-research level of $166.72 compared to the Merrill Lynch price objective of $213. Allergan’s consensus target price is just $208.43.
Merrill Lynch sees Allergan as the best positioned to benefit from key catalysts events among its pharmaceutical peers and sees it as meaningfully undervalued as investor faith in its business model has dissipated. All this adds up to investors debating the merits of a company split ahead of liver, migraine and wet age-related macular degeneration data.
DXC Technology
DXC Technology Co. (NYSE: DXC) is an information technology (IT) services company on which Merrill Lynch has a $103 price objective, indicating implied upside of more than 27% from the recent $81 share price.
Merrill Lynch’s target is actually less than the consensus target price of $105.06. The firm believes that less than 10 times expected 2019 earnings is too cheap of a valuation against peers as the stock has witnessed some dislocation after the recent spin-off of its government services business. Merrill Lynch believes DXC can drive an improving trend in revenues and margins and sees its September analyst day as the primary catalyst for guidance out to 2020 and beyond.
Fluor
Fluor Corp. (NYSE: FLR) has a $58 price objective at Merrill Lynch, indicating an implied upside of about 19%, without considering close to a 2% dividend yield. That target is almost $3.50 higher than the consensus target price of $54.57, and Fluor shares have a 52-week high above $62.
The firm sees Fluor having an attractive risk/reward to the improving energy and mining capex cycle in the coming years, and Merrill Lynch expects that 2018 should mark a trough in its backlog with improvement from mining and energy projects in the second half of 2018.
Honeywell
Honeywell International (NYSE: HON) has a $185 price objective at Merrill Lynch, indicating more than 28% in implied upside from the recent $144 share price. That is without considering the 2% dividend yield.
Merrill Lynch is above Honeywell’s consensus analyst target of $172. Over the past few years, organic growth has been the key bear point on the stock. However, over the past quarter, Merrill Lynch has seen an acceleration at Honeywell Aero driven by business jets and defense, among other things, which it believes could and should translate into Honeywell having consistent top quartile organic growth performance in 2018 and 2019. Merrill Lynch thinks this could drive positive earnings revisions and benefit Honeywell’s multiple.
Marvell Technology
Marvell Technology Group Ltd. (NASDAQ: MRVL) has a $28 price objective at Merrill Lynch, which may be barely above the consensus target price of $27.85, but it represents implied upside of 31% from the recent $21.40 share price.
The firm recently met with Marvell CEO Matt Murphy and the takeaways were as follows: enthusiastic about core growth/margin expansion and positive on the Cavium deal. The firm sees Marvell as an enhanced opportunity to buy a differentiated small/midcap stock with leadership in enterprise storage, security, networking, 4G/5G and cloud/data center, as well as having negligible exposure to the volatile consumer/smartphones markets.
Nucor
Nucor Corp. (NYSE: NUE) is a name that has been front and center in discussions about the trade war and tariffs in steel and metals. Merrill Lynch is rather positive, with a Buy rating on Nucor, and the firm’s $78 price objective implies roughly 24% upside compared with the more recent $63 share price. Nucor’s consensus target price is $77.70, but its 52-week high is right at $70.
The firm believes that Nucor’s near-term earnings can continue to top expectations, with elevated steel prices and being relatively defensive because of its variable costs and variety of end markets and products. Merrill Lynch also sees an increasing likelihood that U.S. prices stay high under tariffs and the firm expects to see a solid free cash flow outlook and strong balance sheet.
SVB Financial
SVB Financial Group (NASDAQ: SIVB) recently has proven its weight as a top bank in 2018, but the Merrill Lynch price objective of $350 implies 21% upside from the more recent $289 share price.
The firm sees the parent of Silicon Valley Bank being among the best secular growth stories in the banking industry, with significantly above-average earnings growth leading the price even higher. Merrill Lynch noted the possibility of accelerated growth as a rising return on equity profile removes capital constraints at the same time the bank can secure larger clients and grow relationships. That said, investors should consider that SVB Financial shares are currently up 25% so far in 2018 and are more than 60% higher than a year ago.
UTC
United Technologies Corp. (NYSE: UTX) has a $195 price objective at Merrill Lynch, and that is handily above the consensus target price of roughly $149.50. It represents a whopping 55% upside from the recent $126 share price, not including the 2.2% dividend yield, and this represents the highest analyst target price among Wall Street’s sell-side analysts.
Merrill Lynch likes UTC’s balanced growth, end-market exposure, operating leverage and execution. The firm went on to say that the company has strong market positions in both aerospace/defense and global infrastructure and noted that its diverse markets should provide a solid hedge for UTC during periods of uncertainty. Merrill Lynch also sees a conservative balance sheet and strong free cash flow conversion allowing for continued share buybacks and mergers and acquisitions.
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