Why Buying Old School Large Cap Technology Leaders Makes Sense Now

October was a brutal month, and you can bet investors are thrilled to see it in the rearview mirror. While the various indices rallied the last two days of the month, and on Thursday to start November, it was one of the worst beat-downs in years, rivaling January of 2016 and the August and September period of 2011. In fact, the S&P 500 was down 16 of 23 trading days in October for a 7% loss, as global equities shed nearly $5 trillion of collective market capitalization.

The question for weary investors, who probably will have little interest in reviewing their October statements, is what to do now? Bond yields are still extremely low despite the increase in the Federal Funds rates, and another hike is probably on the way in December. A solid choice may be to look at the old school big cap technology leaders that also were crushed in October.

We screened the Merrill Lynch technology research coverage universe and found five stocks that could be solid additions to portfolios now. All are rated Buy, and all have traded way down from their respective 52-week highs.

Adobe Systems

This high profile old-school software company has been posting outstanding earnings. Adobe Systems Inc. (NASDAQ: ADBE) operates in three segments: Digital Media, Digital Marketing, and Print and Publishing. 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.

Top Wall Street analysts see the company benefiting from artificial intelligence, predictive analytics, automation bots, speech recognition, and natural language processing or NLP, and image recognition. Some on Wall Street see earnings per share increasing by a solid 30% or more for 2018.

The Merrill Lynch team feel the company deserves a premium multiple to their peers due to Adobe’s strong competitive position in the creative space and above-average growth prospects.

The Merrill Lynch price target is $308, and the Wall Street consensus is set at $290.35. The shares closed Thursday at $245.28 in a 52-week range of $165.68 to $277.61.

Cisco Systems

This is a top mega-cap technology stock pick that reported an outstanding quarter in August and could be posed to do the same in November. 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.

Cisco 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; and 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 which 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 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.

Toss in a massive $25 billion share buyback plan and investors should be well rewarded going forward. Shareholders are paid a solid 2.91% dividend. The Merrill Lynch target price is $53, and that compares with the Wall Street consensus of $51.36. The stock closed Thursday at $45.65 in a 52-week range of $33.67 to $49.47. The company will report earnings on November 14th.

International Business Machines

This blue chip leader may be offering investors the best entry point in years as it has been absolutely crushed. International Business Machines (NYSE: IBM) is a leading provider of enterprise solutions, offering a broad portfolio of IT hardware, business and IT services, and a full suite of software solutions. The company integrates its hardware products with its software and services offerings in order to provide high-value solutions.

IBM is comprised of five major segments: (1) Cognitive Solutions, (2) Global Business Services, (3) Technology Services & Cloud Platforms, (4) Systems, and (5) Global Financing. The analysts have cited the company’s potential in the public cloud as a reason for their positive outlook going forward.

The company recently made a stunning and expensive purchase of open-source software provider Red Hat. The analysts noted this when discussing the purchase.

IBM CEO Ginni Rometty reiterated the high-value proposition of the deal, calling it a game changer for IBM and resetting the Cloud landscape. Ms. Rometty believes that 10-20% of the workloads have moved to the cloud and were more cost focused, but the remaining workloads will need an open, portable and secure architecture to allow clients to move data seamlessly, and thus enable a complete hybrid cloud. She also added that given Red Hat’s position in the open source software market for key technologies of Linux, open containers, Kubernetes, and Openshift will accelerate client transformation.

IBM shareholders are paid a large 5.41% dividend. The Merrill Lynch price target is $200, while the Wall Street consensus is set much lower at $155.94. The shares closed Friday at $116.83 in a 52-week range $114.09 to $171.13.

Microsoft

This is another top old-school technology stock that posted all-time highs this year and has a massive $133.6 billion sitting on the balance sheet. Microsoft Inc. (NASDAQ: MSFT) continues to find an increasing amount of support from portfolio managers who have been adding 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 #2 in the public or hyper-scale cloud infrastructure market with Azure, which is the company’s cloud computing platform offering. Some have flagged Azure as a solid rival to Amazon’s AWS service and others also 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 outstanding earnings report.

Microsoft shareholders currently receive a 1.71% dividend. The Merrill Lynch price target is posted at $140, while the consensus price objective for the company is set at $125.15. The shares closed Thursday at $105.92 in a 52-week range of $80.70 to $116.18.

Four top companies to buy that have mature business silos, but also have many new opportunities to pursue going forward. With the sharp pullback in October, investors can feel good about perhaps acquiring larger than normal positions given the massive market pullback over the last month.

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