History Says Santa Claus Rally May Still Be on Its Way

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Despite the horrible performance in December so far, with the S&P 500 down over 6%, past history says that the time-honored Santa Claus rally typically comes in the latter half of the month. In fact, according to Jefferies, going back to 1990 the majority of outperformance in December is in the final half of the month. In addition, it is even more pronounced for the Russell 2000, where the second half of the month performance averages +3.2% and is positive 86% of the time.

Despite those positive statistics, the fact of the matter is many hedge funds and institutional money managers have badly underperformed this year, and most on Wall Street feel that redemptions have been extraordinarily large. With that in mind, the window dressing for portfolios is almost assured, and fund managers will want to make sure they own stocks that have performed well.

While the Federal Reserve is very likely to raise rates for the fourth time this year this, the language coming out could be very dovish, and many feel the Fed will only raise twice in 2019 and that may be the end of the cycle for a while.

We screened the Merrill Lynch research database for Buy-rated stocks that have had a strong year and would be solid additions to portfolios for the end of 2018 and the beginning of 2019. These six look to be solid additions for growth portfolio managers now.

Adobe Systems

This high-profile old-school software company has posted outstanding earnings. Adobe Systems Inc. (NASDAQ: ADBE) operates in three segments. The Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote and monetize their digital content. The other segments are Digital Marketing and Print and Publishing.

Top Wall Street analysts see the company benefiting from artificial intelligence, predictive analytics, automation bots, speech recognition and natural language processing and image recognition. Some on Wall Street see earnings per share increasing a solid 30% or more.

Merrill Lynch feels the company deserves a premium multiple to its peers due to Adobe’s strong competitive position in the creative space and above-average growth prospects. The company posted solid results last week but still got caught up in the across-the-board selling.

The Merrill Lynch price target has a $309 price target on the shares, and the Wall Street consensus target is $291.26. The shares closed Friday at $230, down over 7% on the day.

Cisco

This top mega-cap technology company recently reported an outstanding quarter. Cisco Systems Inc. (NASDAQ: CSCO) designs, manufactures and sells internet protocol (IP) based networking products and services related to the communications and information technology industry worldwide.

It provides switching products, including fixed-configuration and modular switches, and storage products that provide connectivity to end users, workstations, IP phones, wireless access points and servers, as well as next-generation network routing products that interconnect public and private wireline and mobile networks for mobile, data, voice and video applications.

The company recently released 400G switches that allow customers to create more powerful networks more cost-effectively and in a fraction of the space. They provide four times the bandwidth and four times the scale of existing switches without using four times the power. And since the new switches are built on Cisco’s leading Nexus portfolio, customers can choose to deploy 400G in the way that best meets their needs. They can be used on their own or in combination with Cisco’s leading security, automation, visibility and analytics software.

Cisco posted solid numbers in November, and the stock has acted good all year long. Toss in the continuation of a massive $25 billion share buyback plan, and investors should be well rewarded going forward.

Shareholders receive a 2.88% dividend. The Merrill Lynch target price is $53, and the consensus target is $52.46. The stock closed Friday at $45.82, down 3.5%.

Microsoft

This top old-school technology stock posted all-time highs this year and has a massive $136 billion sitting on the balance sheet. Microsoft Inc. (NASDAQ: MSFT) continues to find an increasing amount of support from portfolio managers, who have added the software giant to their holdings at an increasingly faster pace all of this year and last.

Many Wall Street analysts feel that Microsoft has become a clear number two in the public or hyper-scale cloud infrastructure market with Azure, which is its cloud computing platform offering. Some have flagged Azure as a solid rival to Amazon’s AWS service, while others maintain that Microsoft is discounting Azure for large enterprises, such that Azure may be cheaper than AWS for larger users. The cloud was big in the recent earnings report, which was outstanding.

Microsoft shareholders receive a 1.74% dividend. The $140 Merrill Lynch price target is well above the $125.15 consensus price objective. Shares closed Friday at $106.03.