More and more fund managers and hedge fund managers are doing what they have always done. They all buy the same things, as they always talk among themselves. 2015 was a horrible year for hedge funds, as they absolutely got hammered, and hardly any of the big high-profile managers escaped a beating.
One thing to do is avoid the crowd. A new research report from the always precise Savita Subramanian and her team focuses on three top stocks rated Buy at Merrill Lynch that are reporting earnings this week. The stocks are underweighted by large cap active funds and may provide a contrarian lift this week for aggressive accounts.
Apple
This remains the world’s biggest and boldest technology company, and its shares are down a stunning 28% from highs posted in the spring of 2015. Apple Inc. (NASDAQ: AAPL) leads the world in innovation with iPhone, iPad, Mac, Apple Watch and Apple TV. Apple’s four software platforms — iOS, OS X, watchOS and tvOS — provide seamless experiences across all Apple devices and empower people with breakthrough services, including the App Store, Apple Music, Apple Pay and iCloud.
Apple has stayed in the limelight as the Silicon Valley behemoth comes out with a ton of new product for the Apple nation to embrace. In what is becoming a new trend, many of the former bullish analysts on the stock somewhat yawned at some the new offerings last fall, saying that it was really “no big deal.”
The company announced that customers around the world made the 2015 holiday season the biggest ever for the App Store, setting new records during the weeks of Christmas and New Year’s. In the two weeks ending January 3, customers spent over $1.1 billion on apps and in-app purchases, setting back-to-back weekly records for traffic and purchases. January 1, 2016 marked the biggest day in App Store history with customers spending over $144 million. It broke the previous single-day record set just a week earlier on Christmas Day.
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Many of the Apple suppliers have pre-announced negative earnings, and some think there is risk to the estimates for the March quarter. Wall Street is looking for sales of 75 million units for the fourth quarter. While the March quarter chatter could remain an issue, the long-term story remains in place, and should work well through the balance of 2016 and beyond.
Apple investors receive a 2.09% dividend. The Merrill Lynch price objective is $130, and the Thomson/First Call consensus target is $142.67. The shares closed Monday at $99.44. Apple reports Tuesday after the closing bell.
Electronic Arts
This leading video game developer should benefit from not only the continuing rise in new console sales, but the rising trend of mobile gaming. Electronic Arts Inc. (NASDAQ: EA) produces top-selling games and related content and services under the EA brand in various categories, including action-adventure, role-playing, racing and first-person shooter games. Merrill Lynch just recently raised its rating to Buy.
The company, which is very well-known for its EA sports games like Madden Football, has made the move into mobile play by adapting many of the top franchise titles, which have been popular for years, into the mobile arena. The company reported solid third-quarter earnings, and raised its guidance for Star Wars Battlefront to 13 million units. Many analysts feel that that is a very beatable number.
The company recently announced its plan to launch a new online subscription plan for $4.99 per month. With this subscription, gamers can sample new games before release and receive discounts on purchases. They are also eligible to access a few old games for free under this plan. Electronic Arts launched the online plan to cater to the rising demand for digital gaming content. This service is said to be an extension of Origin, which is the company’s online PC game store and a community with over 50 million members.
Merrill Lynch has an $81 price target. The consensus target is $82.78. The stock closed Monday at $69.92. The company reports earnings on Thursday.
eBay
This leader in e-commerce has fallen way out of favor and could be an outstanding purchase at current levels. eBay Inc. (NASDAQ: EBAY) operates a leading online marketplace that enables consumers to purchase goods globally. eBay has more than 155 million active users and generated more than $80 billion in gross merchandise volume in 2014. eBay also operates Stubhub, Half.com, brands4friends and a number of classifieds businesses globally.
Many see eBay as not only a continuing success story, but a solid holding during volatile times like we are experiencing now. In fact, the company displayed outstanding defensive qualities even in 2008, when gross merchandise value still grew 3%. eBay traditionally has reported better margins and greater capital efficiency than most traditional retailers, since it has no inventory or stores to put on a balance sheet.
The $33 Merrill Lynch price target is higher than the consensus target of $30.48. Shares closed most recently at $26.13. eBay reports earnings on Wednesday.
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While big institutional investors are underweight these stocks now, they will pile in if good earnings and outlooks are presented this week. That said, investors buying in front of reports should realize that if they miss or guide poorly when reporting, the stocks could get hit hard.
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