Portfolio managers and others in charge of investments are facing another up year, but many are trailing their benchmarks, and there is nothing worse for active managers than trailing that benchmark, especially in an up year. For example, if your benchmark is the S&P 500, it is up about 9% for the year. If you are up, say, 6%, then you are trailing the benchmark.
In a new report, SunTrust Robinson Humphrey has combed through 38 analysts and a coverage universe of 730 stocks to come up with 32 stocks to Buy that are designed to help clients “catch up” to their benchmarks. The stocks that made the cut are part of a compelling list of lagging stocks rated Buy that could outperform the overall market this quarter.
We chose five well-known stocks that look like they do indeed have solid upside potential, and all can help add alpha to portfolios.
Alibaba
This red-hot momentum play has continued to be among the most bought tech companies on Wall Street. Alibaba Group Holding Ltd. (NYSE: BABA) runs the largest retail marketplaces (Taobao, TMall) and leading B2B sites (Alibaba.com, 1688.com) in China and Lazada in Southeast Asia. It collects revenues mainly from commissions, marketing services, subscription fees, cloud computing and software, as well as other value-added services.
The company has gone beyond e-commerce and developed into a sophisticated new type of conglomerate in the cyber-era with e-commerce as the base for the rest of the four businesses: logistics, finance, data-computing and cross-border infrastructure. Top analysts expect a whopping 24% compounded annual growth rate between now and 2018 for e-commerce in China.
The SunTrust price target for the stock is $205, and the Wall Street consensus target is $229.33. The shares closed Monday’s trading at $162 apiece.
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Broadcom
This stock has been on fire over the past year and remains a top pick across Wall Street, and it is also on the Merrill Lynch US 1 list. Broadcom Ltd. (NASDAQ: AVGO) has an extensive semiconductor product portfolio that addresses applications within the wired infrastructure, wireless communications, enterprise storage and industrial end markets.
Applications for Broadcom’s products in its 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.
Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the radio frequency (RF) arena. Many on Wall Street see a cyclical rebound in industrial and communications demand. The analysts note that the stock is under-owned compared to peers and the 40% iPhone content growth, combined with the closure of the Brocade purchase, which they feel is accretive, are very positive catalysts. They also feel dividend growth is possible.
Broadcom investors are paid a 1.65% dividend. SunTrust has a $338 price target, and the posted consensus target is lower at $289.35. The stock closed on Monday at $249.51 per share.
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Diamondback Energy
This is a top Permian Basin play for more aggressive accounts. Diamondback Energy Inc. (NASDAQ: FANG) is an independent oil and natural gas company headquartered in Midland, Texas, and focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas.
Diamondback’s activities are primarily focused on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.
Wall Street analysts have noted in the past the company’s top-tier asset base, solid accretive additions and financial discipline, which they think allows for not only continued solid cash flow, but could put the company in play as a takeover target. Diamondback continues to drill some of the most economical wells in the United States as efficiencies improve, costs decrease and activity remains in the better regions.
The $175 SunTrust price target compares with the $169.69 consensus target. The shares closed most recently at $136.80.
Merck
This remains a leading health care stock for conservative investors. Merck & Co. Inc. (NYSE: MRK) offers therapeutic and preventive agents to treat cardiovascular issues, type 2 diabetes, asthma, nasal allergy symptoms, allergic rhinitis, chronic hepatitis C virus, HIV-1 infection, fungal infections, intra-abdominal infections, hypertension, arthritis and pain, inflammatory, osteoporosis, male pattern hair loss and fertility diseases.
The company also provides neuromuscular blocking agents for use in surgery, anti-bacterial products for skin and skin structure infections, cholesterol modifying medicines, non-sedating antihistamine and vaginal contraceptive products.
Merck shareholders receive a 2.68% dividend. SunTrust has set its price target at $77. The consensus target was last seen at $73.04, and the shares closed at $71.53 on Monday.
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Schlumberger
This top oil services company is expected to benefit from increased exploration and production spending, and it is also a member of the Merrill Lynch US 1 list. Schlumberger Ltd. (NYSE: SLB) is the world’s largest provider of services and equipment used in drilling, evaluation, completion, production and maintenance of oil and natural gas wells. Revenues in 2017 totaled $30.4 billion, and EBITDA was $6.9 billion.
The company operates in the oilfield service markets through three groups: Reservoir Characterization, Drilling and Production. Reservoir Characterization Group consists of the principal technologies involved in finding and defining hydrocarbon resources. These include WesternGeco, Wireline, Testing Services and Schlumberger Information Solutions.
Schlumberger mobilized an unprecedented 29 land rigs in the second quarter and will have deployed over 90 rigs by year-end on contract awards. Rising activity, backlog additions for integrated projects and rising oil pricing should be supportive of improving earnings over the next few years.
Investors in Schlumberger are paid a solid 3.25% dividend. SunTrust has a price target of $80. The posted consensus target is $75.39, and the stock ended trading on Monday at $61.59 a share.
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While these companies are not suitable for all investors’ portfolios, they have outstanding upside potential and far less downside than high-flying momentum stocks. Plus, they could very well help investors “catch up” in their own portfolios.
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