Investing

Why Merrill Lynch Value 10 Stocks May Be the Best Bets for 2020

Lee Jackson

Published: December 5, 2019 7:25 am

Last Updated: January 30, 2020 12:32 pm

For years, Wall Street analysts and equity strategists have anticipated the return of value stocks as the market has moved higher, and for years those stocks have continued to underperform growth stocks. However, that may be ready to change in 2020, as almost every metric from valuations to earnings for the growth arena may be ready to roll over.

Value stocks typically are defined as shares of a company with solid fundamentals that are priced below those of its peers, based on analysis of price-to-earnings ratio, yield and other factors. The Merrill Lynch Value 10 portfolio is quantitatively generated and is based on the firm’s proprietary Merrill Lynch versus consensus earnings surprise model, plus three additional screening criteria. The universe the analysts use is the S&P 500.

We screened the Value 10 portfolio for the five stocks with the lowest price-to-earnings ratio on a trailing 12-month basis. We found five top picks that could be big 2020 winners. All are rated Buy at Merrill Lynch.

D.R. Horton

This is one of the highest volume builders in the United States and a top pick at Merrill. D.R. Horton Inc. (NYSE: DHI) is the largest public builder by closings in the country, delivering roughly 52,000 homes in 2018. It is positioned in 79 metropolitan markets in six major regions and develops single-family homes, primarily for first-time and move-up buyers.

Approximately 80% of revenue comes from the Southeast, South Central and West regions, all of which continue to see very solid growth. The company also provides mortgage financing and title agency services to homebuyers.

The company boasts some of the highest quality and fastest growth potential via entry-level exposure and competitively advantaged market share, and it can weather cost pressures with strong free cash flow. Most on Wall Street see upside to estimates from the usage of its $1 billion operating cash flows per year. The company’s priorities are share buybacks, debt reduction and bolt-on mergers and acquisitions. At 12.8 times trailing earnings, the stock looks like a bargain.

Shareholders receive a 1.26% dividend. The Merrill Lynch price target for the shares is $65, while the Wall Street consensus target is much lower at $53.09. The stock closed Wednesday’s trading at $55.34 a share.

E*Trade Financial

This top discount brokerage firm could be offering investors a solid entry point. E*Trade Financial Corp. (NASDAQ: ETFC) is a financial services firm that offers competitively priced brokerage, investing and banking solutions to individuals. The firm has expanded its brokerage and trading offering to banking products, via E*Trade Bank, and investing products and solutions.

E*Trade offers its services online, at branches and through its network of representatives, investment professionals and advisors. The firm has grown organically and via acquisitions throughout its history. The rising market could be a huge boon for the company and investors, and the company’s consistent ad campaigns have helped to drive new customers.

The recent consolidation in the industry also could be a tailwind for the company, as other financial giants look to expand their offerings and increase assets under management.

The stock trades at 10.7 times earnings and yields 1.24%. Merrill Lynch has a $45 price target, while the posted consensus target is $43. The shares were last seen trading at $45.26 apiece.

This old-school leader in semiconductors continues to work hard to focus more on Internet of Things and data center cloud spending, and it is one of the top picks at Merrill Lynch for 2020. Intel Corp. (NASDAQ: INTC) designs, manufactures and sells integrated digital technology platforms worldwide.

The company’s platforms are used in various computing applications, comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.

Intel offers investors a solid 2.25% dividend, and the shares trade at 13.4 times trailing 12-month earnings. The $70 Merrill Lynch price target compares with a $54.45 consensus price objective and the most recent closing price of $56.02 per share.

Marathon Petroleum

This is a solid way to play an energy sector that has lagged dramatically in 2019. Marathon Petroleum Corp. (NYSE: MPC), one of the largest independent petroleum refining and marketing companies in the United States, is based in Findlay, Ohio.

The company operates approximately 2,750 retail sites under the Marathon and Speedway brands. In addition, it operates a logistics network of pipelines, barges, trucks and terminals that store and transport crude and products.

The company bought rival refining giant Andeavor last year for $23.3 billion in the biggest-ever deal for an oil refiner, creating the largest independent fuel maker in the United States. It was one of the biggest mergers in 2018. Following the deal, Marathon became the largest operator of refining capacity in the United States, and management believes the company can achieve the $1 billion in synergies that it suggests.

Marathon Petroleum shareholders receive a 3.53% dividend, while the shares trade at 12.9 times trailing earnings. The Merrill Lynch price target is a whopping $95. The posted consensus target is just $78.57, and the shares closed at $60.03 on Wednesday.

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.

Trading at 10.5 times trailing 12-month earnings, it remains very cheap. The Merrill Lynch price target is $175. The consensus target was last seen at $180.29, and the stock closed trading most recently at $150.53 per share.

While the rotation to value stocks has been a long-time coming, the pricey stock market is making the turn almost inevitable. Toss in the fact that we could have a major early 2020 sell-off, making these reasonably priced companies even a better choice for investors now.