When you have had a market rally like we have experienced the past two years, there comes a time when stock rotation becomes important. If you can rotate to cheaper, quality stocks, you lower the risk of staying fully invested in the equity markets. One area that has underperformed, but has solid growth potential, is computer services and information technology.
A new report from RBC points out that the computer service and IT universe the firm tracks has had a very difficult year, meaningfully underperforming the market through the end of August. In aggregate, the universe decreased 3% on a weighted average basis, with the Payments segment down 5% and IT Services down 1%, compared to the S&P 500, which is up almost 8%. The good thing for investors is that the RBC team thinks that year-to-date underperformance relative to the S&P 500 presents an attractive opportunity.
RBC highlighted four favorite large cap stocks for investors to buy. All are rated Outperform.
Visa Inc. (NYSE: V) is one of the stocks to buy at RBC. The analysts feel that the company is the best positioned one to provide the necessary large-scale security for omnichannel payments, which they believe will become a larger talking point with investors. Given recent security concerns, that makes good sense for investors. They also note that almost 95% of free-cash-flow is being returned to shareholders via dividends and stock buybacks.
Investors are paid a small 0.8% dividend. The RBC price target for this leading credit card company, which also is poised to see benefits from the new Apple Pay platform, is $250. The Thomson/First Call consensus target is $249.41. Shares closed on Friday at $214.04.
MasterCard Inc. (NYSE: MA) is another credit card leader that is rated Outperform at RBC. The analysts feel that the company is well positioned to achieve a very strong 20% earnings growth in 2015. They also see the potential for margin expansion, another key factor for higher revenue growth. International travel is also helping to drive top line growth without volume growth.
MasterCard investors are paid a small 0.6% dividend. The RBC price target for the stock is $85, and the consensus target is set slightly higher at $88.90. The stock closed on Friday at $75.47 a share.
Cognizant Technology Solutions Corp. (NASDAQ: CTSH) provides IT, consulting and business process outsourcing services worldwide. The company operates through four segments: Financial Services; Healthcare; Manufacturing, Retail, and Logistics; and Other. It offers consulting and technology services, such as IT strategy, program management, operations improvement, strategy and business consulting services. The RBC analysts feel that the company can deliver above peer group revenue growth despite what may be a sluggish second half of this year.
The RBC price target for Cognizant is $49, and the consensus figure is even higher at $51.29. The stock closed trading on Friday at $44.76.
Accenture PLC (NYSE: ACN) rounds out the top four large cap computer services stocks to buy. The RBC team views the company as a core portfolio holding that has demonstrated very friendly shareholder capital redeployment over the years. They also feel that Accenture is tapping into the underlying mega-trends of technology, such as data analytics and the cloud, as one of the leading global integrators.
Investors are paid a respectable 2.3% dividend. The RBC price target for Accenture is $87, and the Wall Street consensus target is set at $88.16. Shares closed trading on Friday at $80.97.
When investors can add top stocks to their portfolios that have underperformed versus the overall index, that makes very good sense. It is one thing to make a contrarian call and go against the grain. It is quite another to rotate capital to top companies that have lagged, especially in a pricey market.