Investing

Investors Are Sitting on Mountains of Cash: 5 Blue Chip Buys With Big Upside

Lee Jackson

Published: April 20, 2020 7:00 am

Last Updated: April 20, 2020 7:05 am

One short month ago, we looked doomed. The stocks market had plunged 35% in less than a month, with some of the highest velocity selling ever recorded. Since the dark days of March, things have improved as the Federal Reserve and the Treasury have combined for a massive one-two punch to supply liquidity and order to the markets, and stocks have rallied back almost 30% from the lows.

Despite the rally, extreme bearishness still prevails, and money market funds are bulging with a stunning $4.5 trillion in assets, and the almost 6% cash held by institutional investors is the highest since 9/11 in 2001. The one worrisome statistic now is that the largest five stocks now account for a stunning 22% of market capitalization.

With an eye toward avoiding those companies, which are four of the five FANG stocks and Microsoft, we screened the Merrill Lynch research universe looking for Buy-rated companies that pay a dividend and still have substantial room to run to the Merrill Lynch price target. We found five that make sense now for cautious investors looking to put at least some of the huge trove of cash to work.

AT&T

This is a top telecom and entertainment play. AT&T Inc. (NYSE: T) is the largest U.S. telecom company and provides wireless and wireline service to retail, enterprise and wholesale customers. The company’s wireless network serves approximately 124 million mobile connections, with 77 million postpaid subscribers.

While AT&T’s traditional wireline voice business has undergone a period of secular decline due to wireless substitution and cable competition, the company through WarnerMedia has become a diversified media and entertainment business.

In a smart move to protect the long-standing dividend and improve cash flow, the telecom giant canceled its plan to buy back $4 billion in stock over the next three months, as the coronavirus pandemic reignited criticism of Fortune 500 companies’ repurchasing practices. In a regulatory filing in late March, the company said canceling its buyback agreement will allow it to “focus on continued investment in serving our customers, taking care of our employees and enhancing our network, including nationwide 5G.”

Investors receive a 6.66% dividend. Merrill has a $43 price target for the shares, while the consensus target across Wall Street is $36.34. AT&T stock was last seen trading at $31.23 per share.

Bristol-Myers

This remains a solid pharmaceutical stock to own and is on the Merrill Lynch US 1 list of top stock picks. Bristol-Myers Squibb Co. (NYSE: BMY) is a global pharmaceutical company focused on discovering, developing, licensing and marketing chemically synthesized drugs or small molecules and biologics in various therapeutic areas, including virology comprising human immunodeficiency virus infection (HIV), oncology, neuroscience, immunoscience and cardiovascular.

Bristol-Myers reported strong fourth-quarter results that were largely ahead of Wall Street consensus estimates, given the recognition of revenue from Celgene, which the company bought last year in a massive $74 billion acquisition. Bristol-Myers is expected to report first-quarter results on April 30.

Shareholders receive a solid 2.97% dividend. The Merrill price target is $75, and the consensus target is $70.45. Bristol-Myers Squibb stock closed trading at $60.50 on Friday.

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This top bank is trading at the lowest levels since 2012, and it is the top Merrill pick in the sector. Citigroup Inc. (NYSE: C) has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. It provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management.

Trading at a still very cheap 6.2 times estimated 2020 earnings, this one looks very reasonable in what remains a pricey stock market.

Investors receive a sizable 4.5% dividend. The $60 Merrill price target compares with a $61.64 consensus price objective. Citigroup stock closed most recently at $45.42, after climbing over 12% on Friday.

Intel

This legacy leader in semiconductors has continued working hard to focus more on Internet of Things and data center cloud spending, and it was 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.

The analysts said this in front of the earnings for the first quarter, which will be reported this week:

We see inline first quarter, with our second quarter fiscal year 2020 estimated sales 3-4% below Street estimates. Focus on 10 nanometer manufacturing progress & on original $5 fiscal year 2020 earnings guidance (we/street now lower at $4.57/$4.82) We like Intel’s underappreciated scale/incumbency in secular AI/5G/cloud markets; the dividend yield also attractive/defensible.

Investors receive a 2.19% dividend. The Merrill analysts have set a $68 price target. The posted consensus price objective is lower at $63.10, and the last Intel stock trade on Friday came in at $60.36 a share.

Target

This remains a solid and safe retail total return play, and it is another member of the Merrill Lynch US 1 stock 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.

While the store, like other big-box retailers, was mobbed early on by worried shoppers, the advantage for Target is that the retailer has ample opportunities for revenue synergies. While sales during the initial panic reflected that consumers avoided discretionary items for essential ones, shoppers have now grown accustomed to the new normal, and are well aware that Target is more than just a toilet paper outlet.

In addition, since 2017, Target has poured tons of money into its e-commerce offerings, overhauling its stores and refreshing its inventory to compete better against Amazon. The recent pullback offers investors a solid entry point.

Shareholders receive a 2.33% dividend. The Merrill price objective is at a sizable $150. The much lower consensus target is $124.39, and Target stock ended last week at $113.27 per share, up a solid 4% on Friday.

Two of these five top companies are on the Merrill Lynch US 1 list of top picks. All five stocks are reasonably conservative, pay good and reliable dividends, and also have good upside to the analysts’ price targets. These stocks also will hold up better in the very volatile and often-changing marketplace.