Merrill Lynch's 2001 Top Picks

Nasdaq Composite Index 52-week performance

By Eric C. Fleming
CNBC.com Stocks Reporter

Jan 12, 2001 03:27 PM

According to Merrill Lynch, it is time to return to sanity. The brokerage firm has offered up 15 picks spread out across well-known, and some dull, industries. But there isn't a dot-com to be found.

A period of relative stability may be good for the nerves, but it may not do much for investor returns: Merrill Lynch doesn't foresee a bounceback to the levels that major indexes hit before last fall's slide. In fact, the brokerage firm's chief market analyst Richard McCabe expects the Dow Jones Industrial Average to rise to between 11500 and 11700, the Nasdaq Composite to end up between 3300 and 3500 and the Standard & Poor's 500 Index to finish between about 1400 and 1420

Dow Jones Industrial Average, Nasdaq Composite and the S&P 500 52-week performance comparison

It is all about the economy, of course.

"Consumers are still pulling back on spending," said Merrill chief economist Bruce Steinberg in a press release. All the growth will be packed into the latter half of the year, adds Steinberg, who predicts a net gain of 2.5% in the GDP for 2001.

So, where does Merrill want you to put your money? Technology stocks are off the menu, with a few exceptions, such as storage giant EMC Corp. {EMC, News, Boards} and electronics contractor Solectron Corp. {SLR, News, Boards}.

In a Dec. 28 story, CNBC.com flagged Solectron as a way to play a stock surge in the second half of 2001.

Contract Manufacturers - A Second-Half Bet
And it is no secret that the data storage sector had a great 2000, with EMC eating everyone's lunch.

Threat to EMC is Small (Sept. 12, 2000)
Merrill Lynch says that in terms of financials, interest rate cuts could be a boon to a big money center, like J.P. Morgan Chase & Co. {JPM, News, Boards}. More mergers and acquisitions in 2001 will mean big fees for big banks, which get revenue from a wide variety of sources: brokerage fees, asset management and investment banking, to name a few.

To be sure, J.P. Morgan Chase may be a standout in 2001 because it was a lame duck in 2000, when other banks were raking in earnings. In a year-over-year comparison, the company looks stronger in 2001, in terms of growth in earnings per share, because the second-half of 2000 was weak as a result of a writedown in the value of shares of tech companies the bank owns.

Asset Managers Set for Strong Second Half (Aug. 2, 2000)
In the health-care arena, HCA Healthcare Co. {HCA, News, Boards} is the big bet, with the expectation that changes Medicare reimbursement will mean fatter bottom lines later this year. Baxter International Inc. {BAX, News, Boards} is another pick for 2001. The company sells hospital supplies, while it moves into products with higher profit margins, according to Merrill Lynch.

President-elect George W. Bush hopes to get a $12 billion grant to the states so that Medicare beneficiaries can get subsidies and has other plans to overhaul Medicare. However, it remains to be seen whether Congress will cooperate; members of Congress may be reluctant to spend with a potential recession looming.

Playing the Drug Group Amid Politics
An easy bet to make in times of weaker growth: Drug stocks. While people may forego some discretionary spending and limit the their trips to restaurants, they don't skimp on prescription drugs, the thinking goes. Pfizer Inc. {PFE, News, Boards} was tapped because its pipeline of drugs in development looks strong, and the drugs it currently sells don't have patents that will expire in the near future.

In the dull camp, Merrill Lynch tapped billing outsourcer Convergys Corp. {CVG,News, Boards}, home-improvement retailer Lowe's Cos. Inc. {LOW, News, Boards} and fire-system maker Tyco International Ltd. {TYC, News, Boards}.

The brokerage firm also likes 'em big. Its list includes The Coca-Cola Co. {KO, News, Boards}, the world's largest maker and distributor of soft drinks; Verizon Communications {VZ, News, Boards}, the largest U.S. wireless and wireline communications provider; and Viacom Inc. {VIA, News, Boards}, which owns TV, radio, Web and film assets.

Merrill Lynch's international picks for this year include: ABN AMRO Holding NV {ABN, News, Boards}, AXA {AXA, News, Boards}, British American Tobacco Plc. {BTI, News, Boards}, Elan Corp. Plc. {ELN, News, Boards}, National Australia Bank Ltd. {NAB, News, Boards}, Nortel Networks Corp. {NT, News, Boards}, Petroleo Brasileiro SA (aka Petrobras) {PBR, News, Boards}, Precision Drilling Corp. {PDS, News, Boards}, Royal Ahold NV {AHO, News, Boards}, SAP Aktiengesellschaft {SAP, News, Boards}, Serono SA {SRA, News, Boards}, Sony Corp. {SNE, News, Boards}, STMicroelectronics NV {STM, News, Boards}, TNT Post Groep NV {TP, News, Boards} and Total Fina Elf SA {TOT, News, Boards}.

Daniel Dunaief contributed to this story.


Name/ Ticker/Price  Target*/ Why?

Baxter  BAX  $105       shift to  higher-margin
                       products,  strong R&D
                       pipeline

Chevron   Corp. CHV $ 110 savings from pending
                         merger with  Texaco,
                         control over important oil areas

Coca-Cola Co. KO $ 78 beneficiary as developing
                     economies recover

Convergys  CVG  $ 60 several catalysts on the horizon,
                    like Sprint PCS contract renewal

Corning Inc. GLW $100 expect photonics revenue to
                     double in 2001 to $2B

EMC Corp.  EMC $130 only company with full storage
                   solution

HCA     HCA $46-48  fundamentals of for-profit hospitals
                   improved, Medicare reform could
                   create further upside

Interpublic IPG $52 acquisition of Deutsch a great fit,
                   double-digit revenue growth and
                   15% earnings expansion in 2001

                                 
Lowes Cos. LOW $65 new store expansion planned for
                  next 18 months, early beneficiary of
                  Fed rate cut
             
J.P. Morgan JPM $75 JP Morgan-Chase merger  creates
                      one-stop financial services shop


Pfizer Inc. PFE $58 32% earnings growth for 2001, few
                   patent expirations


Solectron SLR $70 expanding into Asia, 40% revenue
                 growth through 2003


Tyco TYC $100  TYC Lucent Power Systems acqisition
                  LYON financing adding 5-9 cents a
                  share in fiscal 2001
     


Verizon VZ $ 80    ramping up long-distance, DSL services,
                  enough free cash flow to fund growth



Viacom Inc. VIA   $100 well-known brands, diversified ad
                      platforms to ride out weak or strong
                      market

* 12-month target
Source: Merrill Lynch

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