Merrill Lynch Says Tech Hardware Still the Stocks to Own in 2014

By Lee Jackson Published Sep 2, 8:50AM EDT

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With the Nasdaq up about 9%, the most of any of the top indices this year, and the technology sector absolutely on fire, up almost 20% year-to-date, investors have to be thinking it could be time to take profits and rotate money out of the sizzling sector. If they are leaning that way, Merrill Lynch makes the case that this could be absolutely the wrong move for the rest of 2014.

Merrill Lynch’s quantitative strategists point out that the technology hardware sector remains the firm’s most preferred sector. They stress that the sector typically benefits from an improving macro environment, has aggressive styles for an economic upturn and also has a strong combination of earnings and price momentum. All of these may keep the sector trading at a sizable price-to-earnings discount. In other words, Merrill Lynch feels that it is time to stay long or start buying into the top stocks.

We screened the Merrill Lynch research database for top tech hardware stocks rated Buy. We found five stocks that could make solid additions to an aggressive growth portfolio.

Cisco Systems Inc.‘s (NASDAQ: CSCO) dominance in wireless equipment, and its undisputed “800-pound gorilla” status in the industry makes the company an attractive stock to buy now. Earnings for the quarter were solid, but after the big numbers in May, some Wall Street analysts were disappointed. Many firms on Wall Street, including Merrill Lynch, feel that the stock is providing investors a good entry point, despite the fact that some corporate restructuring lies ahead.

Cisco shareholders are paid a solid 3% dividend. The Merrill Lynch price target is $28. The Thomson/First Call consensus target for the networking giant is $26.15. Cisco closed Friday at $24.99 a share.

EMC Corp. (NYSE: EMC) shares have rallied recently on news that Paul Singer’s activist hedge fund Elliott Management has accumulated a stake worth over $1 billion in the storage giant. Many think the activist play is an attempt to spin-off and monetize the huge position in cloud software giant VMware in order to provide additional value for shareholders. While the stake is significant, it certainly at this point cannot dictate terms to EMC.

The storage giant pays shareholders a 1.55% dividend. Merrill Lynch has a $33 price target for the stock. The consensus price objective is at $31.91. EMC closed Friday at $29.53.

Hewlett-Packard Co. (NYSE: HPQ) continues a remarkable comeback, and as personal computer sales growth maintains its slow, but steady comeback, the Silicon Valley icon has expanded the product line to continue to capture sales growth. July sales of PCs for the company were up a staggering 17% year-over-year, which handily outpaced the competitors. With solid margin improvement and growing free-cash-flow, the stock is a good addition to long-term growth portfolios.

Hewlett-Packard investors are paid a 1.68% dividend. The Merrill Lynch price objective is posted at $40, and the consensus is $38.38. The stock closed last Friday at $38.

SanDisk Corp. (NASDAQ: SNDK) is one of the leading manufacturers and suppliers of flash memory storage drives. The burgeoning demand for SanDisk’s products and the increase in price of its micro SD cards contributed to the rise in margins. Most mobile phone manufacturers now provide a card slot in their devices, leading to increased demand for memory cards. Customers looking to store more data have led to the growth of micro SD cards, pushing up demand in the process.

The SanDisk alliance with Apple, which placed major NAND flash orders with SanDisk over the summer, are just increasing the odds the company will continue to be among the leaders dominating flash memory storage. Investors are paid a 1.3% dividend. The Merrill Lynch price target is a whopping $125, while the consensus target is lower at $113.39. SanDisk closed on Friday at $97.96.

Western Digital Corp.‘s (NASDAQ: WDC) market share in the total addressable hard disk drive (HDD) market remains at a very impressive 45%. The company posted very mixed second-quarter earnings, which disappointed many of its followers on Wall Street. The Merrill Lynch team says that despite the miss, and what was very confusing guidance, the long-term story for the company remains very much intact.

Western Digital investors are paid a 1.55% dividend. Merrill Lynch has placed a $115 price target on the stock, while the consensus target is $112.25. Shares closed last Friday at $103.01.

Investors with valuation concerns should look for a fall sell-off to bring prices down. Given that traditionally September and October have proven to be very slippery months, those looking to buy or add to existing positions may want to sell lower priced strike puts at a level they want to purchase stock, or scale in funds now on a partial buy, and look for a better opportunity should selling start up.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.