The ongoing trade and tariff issues most likely will have the greatest impact when companies report second-quarter earnings. Needless to say, investors are wary of the constant back and forth between the United States and other countries on trade, but the reality is it took President Trump to address issues that have festered for decades, as other presidents and U.S. leaders on both sides of the aisle kicked the proverbial can down the road.
While the economy continues to be reasonably solid, the pressure remains on corporations on what to do going forward, pending the final outcome on trade and tariffs. A new Merrill Lynch report suggests second-quarter earnings overall could mirror the first quarter in terms of margin compression, and the analyst maintains that most of the bad macro items are baked into expectations.
The Merrill team screened the S&P 500 for stocks in the firm’s research coverage universe that were the most likely to beat and miss earnings estimates, and they noted that companies that beat get rewarded some, but those that missed are often punished in a big way.
We found five on the list that are solid defensive picks for investors in what is a very expensive market, and they are also under-owned by active fund managers. All are rated Buy at Merrill Lynch.
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Advance Auto Parts
This top stock was hit hard this spring and now offers a great entry point. Advance Auto Parts Inc. (NYSE: AAP | AAP Price Prediction) is the second largest auto parts retailer in the United States, Puerto Rico and the Virgin Islands. It operates more than 4,000 stores under the Advance Auto Parts brand, as well as nearly 200 AutoPart International locations. It sells to both do-it-yourself customers and professional installers.
Investors have hammered the stock despite a report in May of better-than-expected quarterly earnings that were higher year over year.
Investors receive a tiny 0.15% dividend. The Merrill price target for the shares is a lofty $200, while the Wall Street consensus is $192.94. The shares ended Tuesday’s trading at $155.50.
Coca-Cola
This company remains a top Warren Buffet holding and offers not only safety but also an incredibly strong worldwide brand. Coca-Cola Co. (NYSE: KO) is the world’s largest beverage company, refreshing consumers with more than 500 sparkling and still brands.
Led by Coca-Cola, one of the world’s most valuable brands, the company’s portfolio features 20 billion-dollar brands including Diet Coke, Fanta, Sprite, Coca-Cola Zero, vitaminwater, Powerade, Minute Maid, Simply, Georgia and Del Valle. Globally, it is the number one provider of sparkling beverages, ready-to-drink coffees and juices and juice drinks.
Through the world’s largest beverage distribution system, consumers in more than 200 countries enjoy Coca-Cola beverages at a rate of more than 1.9 billion servings a day. With coolers getting packed for picnics, parades and vacations you can bet that they will be stuffed with products from this iconic American company. Also remember that the company also owns 16.7% of Monster Beverage, which continues to deliver big numbers.
Coca-Cola investors receive a 3.10% dividend. Merrill has a $55 price target, and the consensus target is $52.09. The stock closed at $51.59 on Tuesday.
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Kimco Realty
This top real estate investment trust (REIT) makes sense for more conservative accounts seeking income. Kimco Realty Corp. (NYSE: KIM) has specialized in shopping center acquisitions, development and management. It owns and operates the nation’s largest portfolio of neighborhood and community shopping centers with interests in the company-owned interests in 430 U.S. shopping centers comprising 75 million square feet of leasable space, primarily concentrated in the top major metropolitan markets.
Year to date, the company’s dispositions included 12 properties and one land parcel, totaling 1.9 million square feet, for a gross sales price of $226.1 million. Kimco’s allocable share of the sales price was $161.1 million. The blended cap rate for the property sales is in line with the company’s expected range of 7.25% to 7.75%. Currently, the company has approximately $145.3 million of properties under contract that are expected to close during 2019. Kimco’s share of the sales would be $86.6 million.
Shareholders receive a 6.01% distribution. The $21 Merrill price target compares with the $17.97 consensus target. The shares closed most recently at $18.64.
Pfizer
This top pharmaceutical stock made a gigantic splash in June with a $10.6 billion purchase of cancer drug maker Array BioPharma. Pfizer Inc. (NYSE: PFE) is a global biopharmaceutical company with a diversified portfolio of products and pipeline candidates, and it is one of the largest pharmaceutical companies in the world as measured by market capitalization and revenue. It also is a component of the Dow Jones industrial average and has one of the highest paid CEOs in America.
The company’s commercial operations are bifurcated into two business segments: Innovative Health, which focuses on the development and commercialization of medicines and vaccines, as well as consumer health care products, in various therapeutic areas, and Essential Health, which offers branded generic products, biosimilars, anti-infectives and other products without marketing patent protection.
Investors receive a 3.32% dividend. Merrill has set its price objective at $49. The consensus price objective is $45.92, and the shares closed at $43.37.
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Target
This remains a solid and safe retail total return play now, and it resides on the Merrill Lynch US 1 list. Target Corp. (NYSE: TGT) is one of the largest discount retailers in the United States, operating roughly 1,800 Target stores across the country. The company sells merchandise in its Signature Categories Style, Baby, Kids and Wellness, as well as other products in both physical Target stores and online at Target.com.
Over the past couple of years, Target has poured tons of money into its e-commerce offerings, overhauling its stores and refreshing its inventory to compete better against Amazon. Target has even embraced the same-day delivery concept and is expanding retail floor space for toys as it looks to scoop market share after the closing of Toys “R” Us.
Solid numbers and a very positive analysts day had the Merrill analysts noting that they believe the company’s ability to moderate fulfillment costs through its “stores as hubs” model should drive margin improvement in fiscal 2020. They also feel the valuation is compelling at current levels.
Shareholders receive a 3.00% dividend. The Merrill price objective is at $105. The consensus target of $88.20 compares with the most recent close at $87.80 a share.
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These five top companies all pay dividends, have more defensive stocks and could come in with results that beat analysts’ expectations. While there is no guarantee they will, regardless of the actual results, they are solid additions to growth and income portfolios, especially for investors with a long-term horizon.
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