Earlier this month Bank of America/Merrill Lynch (BAC) strategist Savita Subramanian prepared a list of Merrill Lynch’s 10 favorite stocks for 2012. Merrill Lynch analysts predict a 12-month target return of 6.9% for SPY, while they expect a 30% return for the following 10-stocks:
Lincoln National (LNC) is a multiple insurance and retirement businesses company. The company has a market cap of $5.6 billion. Merrill Lynch likes LNC because of the potential for dividends and buybacks. LNC lost 35% year to date. The stock has a beta of 2.62 and a dividend yield of 1.7%. It currently trades a 4.29 forward PE and an 8% expected EPS growth rate. Leon Cooperman’s Omega Advisors had the most shares among the hedge funds we track, with 2.71 million shares at the end of September.
Marathon Oil Corp (MRO) is an international energy company with a market cap of $19.34. Merrill Lynch likes MRO because of the high yield. MRO has returned 21% so far in 2011. It has a beta of 1.24 and a dividend yield of 2.2%. Its forward PE is 6.83, and its EPS is expected to grow at 5%. Cliff Asness’ AQR Capital Management had 2.62 million shares in the stock, after the firm doubled its position during the third quarter.
CenturyLink Inc. (CTL) is an integrated communications company. The company has a market cap of $22.21 billion. Merrill Lynch says the company is cheap and has a high dividend yield. It has a beta of 0.54, and an extremely high dividend yield of 8.2%. So it’s a good choice for defensive investors who are looking for alternatives for long-term Treasuries. The stock has a forward PE of 13.04, and an expected EPS growth rate of 3%. Phill Gross and Robert Atchinson’s Adage Capital Management had 2.50 million shares in the stock as of September 30th.
Apple Inc. (AAPL) The iPad and iPhone maker returns 18% so far in 2011. It has a market cap of $366.24 billion. Merrill Lynch is positive on Apple’s growth potential in the PC and handset markets. AAPL has a beta of 0.82, and trades at a forward PE of 11. Its EPS is expected to grow by 22% annually in the next five years, which is the highest among all the 10 stocks in this list. AAPL does not pay any dividends. One third of the hedge funds we track had positions in AAPL at the end of the third quarter. The biggest hedge fund shareholder is Ken Griffin, whose Citadel Investment Group had 2.43 million shares in AAPL.
Air Products & Chemicals, Inc. (APD) is basic material provider which supplies products to a wide range of industries. APD has a market cap of $17.74 billion, and has lost 9% year to date. Merrill Lynch likes APD because the company may benefit from the recovery of the global industrial economy and from the rising global energy prices. The stock has a forward PE of 13.62 and its EPS is expected to grow at 10%. In addition, it has a dividend yield of 2.8%. Ric Dillon’s Diamond Hill Capital reported 1.68 million shares in his 13F portfolio in the third quarter.
CBS Corp (CBS) is a mass media company. The stock has a market cap of $16.98 billion. Merrill Lynch believes CBS “has solid fundamentals across the board and has the support from an announced $1.5 billion share repurchase authorization”. CBS has returned 31% in 2011, so it has the best performance among the 10 stocks. The stock currently trades at a 13.04 forward PE and a 14% expected EPS growth rate. The stock also has a dividend yield of 1.60%. Among CBS’s stakeholders, Ken Heebner’s Capital Growth Management took the largest portion, with 6.56 million shares at the end of the third quarter.
Eli Lilly & Co (LLY) specializes in pharmaceutical products. The stock has a market cap of $47.34 billion. Merrill Lynch believes LLY is a high quality, inexpensive stock. The stock returned 23% in 2011. LLY has a beta of 0.67 and a forward PE of 9.39. Its expected EPS growth rate is negative, but the stock has a 4.8% dividend yield. Jim Simons’ Renaissance Technologies was LLY’s biggest hedge fund stakeholder in the third quarter. The firm had 7.10 million shares in the stock at the end of September.
Union Pacific Corp (UNP) is a transportation company. It has a market cap of $48.74. Merrill Lynch says UNP will benefit from its improved operations. UNP has earned 9% so far in 2011. The stock has a forward PE of 15.1 and an expected EPS growth rate of 14%. It also has a 2.4% dividend yield. So the stock might be a solid investment opportunity. Chris Hohn’s Childrens Investment Fund increased its position by 34% and had 3.61 million shares in UNP at the end of September.
Altria Group Inc. (MO) is the largest cigarette producer in the United States. The stock has a market cap of $61.20 billion. Merrill Lynch believes MO’s shareholders can earn from the price growth, cost cutting and share repurchases. The stock has returned 25% year to date. It trades at a 14.42 forward PE and a 7% expected EPS growth rate. MO is a good dividend stock which has a 5.6% dividend yield, so it might be a great alternative to long-term Treasuries. Tom Russo’s Gardner Russo & Gardner had the most among hedge fund investors, with 7.10 million shares.
Xcel Energy Inc. (XEL): is an electric power and natural gas supplier. The company has a market cap of 13.09. The analyst believes XEL has a solid investment in wind generation program and multi-state utility model. XEL has gained 15% year to date. It now trades a 15.14 forward PE and a 5% expected EPS growth rate. The stock has a 0.29 beta and a 3.90% dividend yield. Jim Simons was bullish about the stock. His Renaissance Technologies initiated a brand new position of 610 thousand shares in XEL during the third quarter.
Overall these seem to be solid stock picks with potential to deliver solid returns. However, we don’t think that these picks have much chance in beating the S&P 500 index by 25 percentage points in 2012. We think Apple (AAPL) and CBS have the potential to beat the market by more than 10 percentage points. Higher dividend stocks will probably beat the market if there is a huge decline in the S&P 500 index, but in an increasing market high dividend stocks will probably underperform the market.