For years the so-called FANG stocks (Facebook, Amazon, Netflix and Google) were all the rage. That was where the top portfolio managers put some huge bets, and boy did it pay off. While there still could be upside left in these stocks, and technology remains heavily overweight, for the fourth time in the past five months holdings in technology by large-cap active managers have fallen.
So the question is where is all that money from technology going? In a new Merrill Lynch research piece, Savita Subramanian, the firm’s outstanding equity and quant strategist, makes the case that while tech exposure has dropped, a pick-up in cyclical exposure suggests that some of the more bearish fund managers’ outlooks may be improving.
The report also includes a list of stocks that are rated Buy at Merrill Lynch but are heavily underweighted by the top active managers. We picked five that pay dividends, are held by less than a third of fund managers and still offer investors solid upside potential in a pricey market.
This conservative information technology company makes the list. Automatic Data Processing Inc. (NASDAQ: ADP) is one of the world’s largest providers of business outsourcing and human capital management solutions. It offers a wide range of human resource, payroll, talent management, tax and benefits administration solutions from a single source, and it helps clients comply with regulatory and legislative changes, such as the Affordable Care Act (ACA).
The company has been primarily benefiting from continued strength in its PEO services and growth in its newer platforms like RUN, Workforce Now and Vantage. In addition, it has a sizable market share in the payroll processing business. Apart from the core payroll processing business, ADP is also expected to benefit from new higher-growth services like tax filing, retirement, pre-employment, insurance and others.
ADP investors are paid a 2.09% dividend. The Merrill Lynch price target for the stock is $131, and the Wall Street consensus target is much lower at $117.23. The stock closed Monday’s trading at $120.76.
This may be a great company for investors looking for retail exposure. Best Buy Co. Inc. (NYSE: BBY) is the top specialty retailer of consumer electronics. The company finished 2016 with 1,363 domestic stores, including 1,026 Best Buys, 28 Pacific Sales locations and 309 stand-alone Best Buy Mobiles. The company also offers a variety of high-margin services, through its Geek Squad and Magnolia home theater channels.
Despite a solid run, Merrill Lynch still likes the shares for 2018 as the company has a favorable combination of upside from tax reform, a beneficial cycle and protection from disruption as it has few challengers in its space.
Investors are paid a 2.38% dividend. Merrill Lynch has a $78 price target, and the consensus target is $67.07. The shares closed on Monday at $76.59.