Merrill Lynch's Top Second-Half 2019 Small and Midcap Stock Picks

Investing

Published: July 15, 2019 6:55 am

Last Updated: January 30, 2020 6:39 pm

As the markets have raced to historic highs, it’s important to remember that the so-called FAANG stocks, (Facebook, Apple, Amazon, Netflix and Google) have driven much of the record-breaking performance not only this year but over the past five years. With the market clearly close to, or at full value, it makes sense to look to areas where alpha can be generated for the rest of 2019.

An area that could make sense for investors now could be the small and midcap stocks (SMID), and a new Merrill Lynch research report offers the firm’s top ideas in those categories

The report noted this:

As investors focus on alpha opportunities for the remainder of 2019, in this note we publish our analysts’ best ideas for the second half of 2019 within the small and mid (SMID) cap size segment of the US equity market. We focus on Buy-rated stocks of at least $1 billion in market cap (and liquidity no lower than $20 million per day) that fall into a major small or mid cap benchmark (plus one idea from our MLPs team), which our contributing teams consider their best ideas for the second half within their SMID-cap coverage based on upcoming catalysts, expected upside, risk/reward tradeoff, etc.

The Merrill team has 27 top picks, but we screened the group for the larger members with the highest brand and sector recognition. These found five that look like great picks for aggressive growth accounts with a higher degree of risk tolerance.

Diamondback Energy

This top Permian Basin play for more aggressive accounts could be a takeover target. 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 Merrill price target on the stock is $165, while the Wall Street consensus target is $151.34. The shares closed Friday’s trading at $110.83.

Domino’s Pizza

This stock has been on fire and could break out technically and go even higher. Domino’s Pizza Inc. (NYSE: DPZ) is the number one pizza delivery company in the world, with roughly 13,000 stores in 50 states and more than 70 countries. The company’s system is more than 97% franchised, and 59% of the stores are located internationally.

Domino’s has been benefiting from a steadily growing online/digital ordering mix that currently represents over 50% of domestic orders and has a long runway for growth. Since 2008, more than 80% of the menu offerings are new or significantly revised.

Top Wall Street analysts have cited sustainable drivers that include the company’s strong, consistent price-value relationship; improving franchise unit economics due in part to the proven strategy of “fortressing” markets; and growing scale and digital sophistication.

Merrill has a price target of $305, and that compares with a consensus target of $305.60. The stock closed at $281.40 on Friday.

ALSO READ: 5 Red-Hot New Stocks Trading Under $10 With Huge Upside Potential

HubSpot

This stock has rallied and may be another breakout candidate. HubSpot Inc. (NYSE: HUBS) is a cloud-based provider of inbound marketing tools such as website content management, blogging tools, email campaign, search engine optimization, social media monitoring and management, customer relationship management and others for small businesses and mid-sized companies. Its tools provide a single console for marketing professionals to generate new customer leads, convert leads to customers and customers to repeat customers.

This was a top technology holding among hedge fund and mutual fund portfolio managers in a recent survey, and the analysts note in the report that the company has limited smartphone exposure and unique asset mix with potential for further upside on the 5G rollout.

The $210 Merrill Lynch price target is higher than the $190.67 consensus target price. The stock closed most recently at $179.71 a share.

Marvell Technology

This is one of the favored midcap picks on Wall Street. Marvell Technology Group Ltd. (NASDAQ: MRVL) is a fabless supplier of mixed-signal and analog semiconductor products to a number of storage, computing and communication applications, including hard disk drives, personal computers, servers, Ethernet switches, printers and connectivity markets.

Top analysts around Wall Street remain very positive on the company’s 2017 purchase of Cavium, and many feel the deal adds significantly to the growth element for the stock. The addition also helps make Marvell solidly positioned in data center, cloud, enterprise, security and 5G.

Marvell Technology shareholders receive a 1.25% dividend. Merrill has set its price target at $28. The posted consensus price objective is $27.29, and the stock closed trading on Friday at $25.40.

ALSO READ: Merrill Lynch Has 8 Top US Stock Ideas for Q3

Sarepta Therapeutics

This is a favorite midcap biotech pick at Merrill for the rest of 2019. Sarepta Therapeutics Inc. (NASDAQ: SRPT) focuses on the discovery and development of RNA-based therapeutics for the treatment of rare, infectious and other diseases. Its lead product candidate is eteplirsen, an antisense phosphorodiamidate morpholino oligomer therapeutic that is used for the treatment of individuals with Duchenne muscular dystrophy, a genetic muscle-wasting disease caused by the absence of dystrophin.

The stock popped recently when Pfizer announced data on its gene therapy for Duchenne muscular dystrophy that appeared to be inferior to results on Sarepta’s own offering. There is currently no available cure for this form of muscular dystrophy, one of the most common genetic diseases in the world. The gene therapies, if they live up to their promise, could allow patients born with the disease to live normal lives.

The Merrill price objective is $200. The consensus target is $209.95, and the shares were last seen trading at $156.10.

These five top stocks are the best picks from the Merrill team for the second half of 2019. Earnings season has begun, so it may make sense to buy partial positions now and see how the results come in.

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