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Traders at the New York Stock Exchange (Richard Drew)
Traders at the New York Stock Exchange (Richard Drew)

TheStreet

Merrill Lynch's 10 favourite U.S. stocks for 2012 Add to ...

Apple, Marathon Oil, and CBS made Merrill Lynch’s list of top stocks for 2012 and may help investors beat the market next year by a wide margin.

Merrill Lynch strategist Savita Subramanian compiled the firm’s favourite stock ideas for 2012, plucking one name from each of the 10 sectors of the S&P 500. Subramanian says the stock picks align with Merrill Lynch’s investment themes for the year ahead.

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The Merrill Lynch analysts have a 12-month price target of 1,350 for the S&P 500, 6.9 per cent higher than current levels. By comparison, the average return of the 10-stock portfolio, based on the price targets offered by analysts, is 30 per cent.

The New York-based firm, which doesn’t offer updates during the year on the list, says the stocks are chosen by Merrill Lynch’s fundamental analysts. All companies carry a “buy” rating and are reviewed for favourable valuation, quality, yield and growth.

As it turns out, next year’s favourites could have stood in for the firm’s best picks for 2011. The group has an average return of 5.3 per cent this year. The S&P 500, a broader measure of the largest stocks in the U.S., is little changed. Of Merrill Lynch’s group of favourite stocks, CBS is the best performer so far this year, up 34 per cent, while Lincoln National lags the most, with a 26 per cent drop.

The 10 stocks on Merrill Lynch’s list are arranged below in order of potential upside, based on the firm’s 12-month price target and the stock’s price as of Dec. 5.

10. Xcel Energy

Company Profile: Xcel Energy is a supplier of electric power and natural gas service in several U.S. states, including Colorado, Kansas, Michigan, Minnesota, New Mexico, North Dakota, Oklahoma, South Dakota and Texas.

Sector Representation: Utilities

Potential Upside: 7.4 per cent based on a price target of $28

Investment Thesis: Analyst Steve Fleishman touts Xcel for the company’s yield, earnings stability and dividend growth. He also likes the stock as it is one of the highest quality, lowest risk regulated utilities in his coverage universe.

“We like XEL’s strong rate-base wind program and multi-state utility model, and find the stock attractive post its equity overhang completion,” Fleishman writes. “Investments in wind generation provide solid growth. Challenges will be translating these opportunities into [earnings-per-share]growth by managing cash flow and regulatory lag.”

9. Altria

Company Profile: Altria is the parent company for Philip Morris USA, John Middleton, U.S. Smokeless Tobacco Company, Ste. Michele Wine Estates and Philip Morris Capital. The company’s brands include Marlboro, Parliament, Virginia Slims, Stag’s Leap Wine Cellars and Basic.

Sector Representation: Consumer staples

Potential Upside: 9.5 per cent based on a price target of $31 Investment Thesis: Lisa Lewandowski says that tobacco is the firm’s preferred staples industry, and that Altria gets the nod because it is the highest yielding S&P 500 tobacco stock.

“Altria is the largest U.S. cigarette producer, with about a 50 per cent market share,” she writes. “While the tobacco litigation environment has improved in recent years, consumption trends continue to decline. We expect price growth, cost cutting and share repurchases to drive above category earnings growth and we expect returns to shareholders to rise. As such, we believe Altria should trade at a premium to peers.”

8. Union Pacific

Company Profile: Union Pacific operates a railroad franchise that covers 23 states in the western U.S., extending as far east as Chicago and New Orleans.

Sector Representation: Industrials

Potential Upside: 12.1 per cent based on a price target of $118

Investment Thesis: Analyst Ken Hoexter says that Union Pacific comes up under the firm’s screens for yield and high quality. Specifically, he highlights Union Pacific as a solid investment opportunity in a slow-growth environment.

“We continue to believe the rail group will improve service metrics and raise core rates,” Hoexter writes. “Union Pacific has improved its operating ratio from the mid-80s to 70 per cent most recently, which has led to sustained upper-teens earnings growth. Ongoing benefits look to be derived as it moves to reprice the approximately 12 per cent of its business that has not re-priced since 2004.”

7. Eli Lilly

Company Profile: Eli Lilly is the 10th-largest pharmaceutical company in the world. It’s pharmaceutical products include Cialis, Prozac, Methadone and Cymbalta.

Sector Representation: Health care

Potential Upside: 14.3 per cent based on a price target of $43

Investment Thesis: Analyst Gregg Gilbert favors Eli Lilly in the health care space because of yield, quality and inexpensive valuation. He notes that Eli Lilly is the highest dividend yield of the S&P 500 pharma stocks.

“Eli Lilly offers a good mix of low valuation, a track record of returning cash to shareholders, and pipeline optionality, in our view,” Gilbert writes. “Any positive pipeline news or reasonable business development deals could result in improved sentiment.”

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