4 Small Cap Technology Stocks That Portfolio Managers Love

By Lee Jackson Published Sep 15, 8:55AM EDT

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While it’s not always the best strategy in the world, owning what the top portfolio managers have in their hedge funds and mutual funds is a way to let some of the best minds in the industry do the research for you. In a new research report, Merrill Lynch surveyed some of the top funds and managers to get an idea of what stocks they like the best.

The Merrill Lynch report has a list of the top 25 stocks owned by small-cap growth managers on a percentage of funds that own the specific stocks. We screened that list for technology companies 24/7 Wall Street readers may be familiar with and came up with four outstanding stocks to buy now.

Cavium

This stock has been a Wall Street favorite for some time, and it could be a great addition to portfolios. Cavium Inc. (NASDAQ: CAVM) generates a sizable part of its revenue from the association it has with Cisco Systems with security and multi-core embedded processors. Analysts around the street see the company well positioned with multi-core processor portfolio and design wins in enterprise and service provider markets.

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Research indicates that Cavium sees its core business outside of wireless growing nicely for the remainder of the year and next year as well. The company’s data center business is being driven by demand for LiquidIO 1 cards at its largest cloud data center customer, and other customers may be on board soon. The Merrill Lynch report indicates that a staggering 43.1% of small-cap funds own this top technology company.

The Thomson/First Call consensus price target for the stock is $69.70. Shares closed Monday at $72.04.

Proofpoint

This top cybersecurity player is also owned by 43.1% of the small-cap funds that Merrill Lynch surveyed. Proofpoint, Inc. (NASDAQ: PFPT) is a leading security-as-a-service provider that focuses on cloud-based solutions for threat protection, compliance, archiving and governance, and secure communications. Proofpoint provides patented technologies and on-demand delivery systems to protect against phishing, malware and spam, and to safeguard privacy, encrypt sensitive information and archive and govern messages and critical enterprise information.

This stock got hit hard recently and is offering aggressive investors perhaps the best entry point since last spring. Last month the company announced the availability of Proofpoint Targeted Attack Protection (TAP) Mobile Defense, providing security teams with the ability to stop malicious Android and iOS mobile apps before they compromise sensitive data. Proofpoint TAP Mobile Defense leverages technology assets recently acquired from Marble Security and extends Proofpoint’s proven threat intelligence and advanced threat protection for email and social media security.

The consensus price target is $76.95, and the stock closed most recently at $58.84.

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Manhattan Associates

Merrill Lynch indicated that a whopping 41.2% of the funds surveyed owned this company. Manhattan Associates Inc. (NASDAQ: MANH) makes commerce-ready supply chains that bring all points of commerce together customers are ready to sell and ready to execute. Across the store, through the network or from the fulfillment center, the company can design, build and deliver market-leading solutions that support both top-line growth and bottom-line profitability. By converging front-end sales with back-end supply chain execution, the software, platform technology and unmatched experience help the customers get commerce ready and ready to also reap the benefits of the omni-channel marketplace.

With consumer discretionary dollars starting to jump from lower gas prices and an improving economy, it makes sense that more and more retail outlets will use the kind of products that Manhattan Associates provides to streamline everything from ordering to inventories to delivery.

The consensus price target is $69, and the shares closed Monday at $61.31.

Ultimate Software

This stock is owned by 41.2% of the funds that the Merrill Lynch team surveyed. Ultimate Software Group Inc. (NASDAQ: ULTI) is a leading provider of cloud-based human capital management (HCM) solutions, with more than 20 million people records in the cloud. Ultimate’s award-winning UltiPro delivers HR, payroll, talent and time and labor management solutions that connect people with the information they need to work more effectively.

The demand for predictive analytics in the area of HCM is rapidly increasing, as businesses are seeing the value of big data and data modeling across many areas of the business, such as expense management and inventory management. While the market cap of the stock barely stays in the small-cap range at $5.24 billion, the shares have had a solid year and the recent pullback gives investors a better entry point.

The consensus price objective is set at $194.61. The stock ended Monday at $183.38 per share.

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Again, just because a large percentage of portfolio managers like these stocks isn’t always a reason to buy them. However, the top funds employ highly paid analysts to do stringent research on companies, and those that are widely owned generally have outstanding attributes.

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.