Last week provided investors the proverbial roller-coaster ride of a lifetime. Huge up and down moves culminated in the S&P 500 being up over 10%. Needless to say, the discussion across Wall Street and in the financial media has been if a bottom was put in. The massive selling of corporate debt suggests that it is possible, and money market funds are currently bursting with an estimated $245 billion in assets. There was so much selling in the bond markets that by an assets under management percentage, the outflows exceeded the worst week of the global financial crisis by two times. Toss in the gigantic number of first-time claims for unemployment, and the water is indeed muddied.
Given the gigantic downside move made before last week, it’s a good bet that many investors are too shell shocked to consider moving right back into equities. A chorus of voices on Wall Street suggests, like in most bear market sell-offs, that we will retest the bottom, which means the intraday low of 2,191 and the closing low of 2,237on the S&P 500.
If that is indeed the case, then we may indeed have what legendary value investor Bill Miller called recently one of the five best opportunities to buy stocks in the past 50 years. In what is clearly a new time for investing and investors, we screened the Merrill Lynch research universe looking for companies that are “must owns” for growth investors looking to the future. All are rated Buy at Merrill.
Alphabet
The search giant continues to expand and, while search remains king, the cloud presence is growing fast. Alphabet Inc. (NASDAQ: GOOGL) is a global technology company focused on key areas, such as search, advertising, operating systems and platforms, enterprise and hardware products. It generates revenue primarily by delivering online advertising and by selling apps and contents on Google Play, as well as hardware products. The company provides its products and services in more than 100 languages and in 190 countries, regions and territories.
Alphabet offers performance and brand advertising services. It operates through Google and Other Bets segments. The Google segment includes principal internet products, such as Search, Ads, Commerce, Maps, YouTube, Apps, Cloud, Android, Chrome and Google Play, as well as technical infrastructure and newer efforts, such as virtual reality.
Google has outlined expanding capabilities to facilitate commerce, capitalizing on the “treasure trove” of data provided by seven different properties, each with at least a billion active users (Android, Search, Chrome, Maps, Play, YouTube and Gmail).
Advertising remains a huge growth area as well, and the analysts expect the company to be a huge winner as product and service vendors look to reach the biggest possible audience.
Merrill has a $1,372 price target for the shares, but the Wall Street consensus target is up at $1,559.20. Alphabet stock closed Friday’s trading at $1,110.26 a share.
Amazon
This company is the absolute leader in online shopping and is on the Merrill Lynch US 1 list of top stock picks. Amazon.com Inc. (NASDAQ: AMZN) serves consumers through retail websites that primarily include merchandise and content purchased for resale from vendors and those offered by third-party sellers. It has one of the most valuable brands in the world.
The company serves developers and enterprises through Amazon Web Services, which provides computing, storage, database, analytics, applications and deployment services that enable virtually various businesses. AWS is also the undisputed leader in the cloud now, and many top analysts see the company expanding and moving up the enterprise information value chain and targeting a larger total addressable market.
The company is also rolling out its checkout-free Go technology in a large grocery store and plans to license the cashier-less system to other retailers. Amazon Go Grocery opened in Seattle on Tuesday. It uses an array of cameras, shelf sensors and software to allow shoppers to pick up items as varied as organic produce and wine and walk out without stopping to pay or scan merchandise. Accounts are automatically charged through a smartphone app once shoppers leave the store.
The Merrill target price is a whopping $2,480, and the consensus target is $2412. Amazon stock was last seen trading at $1,900.10.
Apple
This technology giant also had been on a roll until the sell-off, but there are some concerns on forward iPhone demand. Apple Inc. (NASDAQ: AAPL) designs, manufactures and markets consumer electronics and computers, and has developed its own proprietary iOS and Mac OS X operating systems and related software platform/ecosystem.
Revenues are principally derived from the iPhone line of smartphones, hardware sales of the Macintosh family of notebook and desktop computers, iPad tablets and iPod portable digital music players. The company also realizes revenue from software, peripherals, digital media and services.
It’s no surprise that this technology giant is a huge institutional holding, as almost 80% of portfolio managers own the stock. One of those managers is the legendary Warren Buffett. Comprising almost 25% of the Berkshire Hathaway portfolio, Apple represents Buffett’s largest holding, with a reported 252 million shares in the tech giant.
Shareholders receive a 1.45% dividend. The $300 Merrill price target compares to the $313.57 consensus target. Apple stock closed most recently at $247.74.
The huge social media leader has been on a roll, though it was hammered in the month-long sell-off. Facebook Inc. (NASDAQ: FB) is the largest social network, with over 2.3 billion monthly active users and over 1.6 billion daily active users. The company generates revenue from advertising and from payments, with over 95% of revenue from advertising. It generates close to 50% of revenues in the United States and Canada and is expanding rapidly in international markets.
The company’s solutions also include Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends. Messenger, a messaging application for mobile and web on various platforms and devices, enables people to reach others instantly, as well as enable businesses to engage with customers. WhatsApp Messenger is a mobile messaging application.
Facebook reported solid fourth-quarter results that beat expectations. Going forward, management expects revenue growth deceleration in the first quarter, and it said in the earnings call that the majority of the ad targeting headwinds are ahead of the company. That said, many analysts are buyers on any stock weakness, citing commerce advertising, Facebook messenger and Instagram.
The Merrill price target is $200. The consensus target is $249.33, and Facebook stock closed on Friday at $156.79.
Microsoft
This legacy tech company has an incredible $135 billion on the balance sheet. Microsoft Inc. (NASDAQ: MSFT) manufactures, licenses and supports a wide range of software products. The company has transformed its business model from a component-driven model (PC, server) to one driven by the need for cloud capacity. It is also considered one of the best companies to work for.
Many Wall Street analysts agree that Microsoft has become a clear number two in the public or hyper-scale cloud infrastructure market with Azure, which is the company’s cloud computing platform offerings, and which continues growing at triple-digit levels. Some have flagged Azure as the biggest rival to Amazon’s AWS service.
Microsoft reported strong fiscal second-quarter results across the board, with Azure accelerating to an impressive 64% year-over-year growth rate from 63% last quarter. Total revenue growth was 15%, and management guided double-digit revenue growth and 2% of operating margin expansion in fiscal 2020. The analysts see strong visibility into double-digit percentage revenue growth, supported by multiple drivers (Intelligent Cloud, Productivity & Business Processes) and secular trends for the foreseeable future.
Shareholders receive a 1.36% dividend. Merrill has set a $190 price target. The consensus price objective is in line at $189.68, and Microsoft stock last closed at $149.70.
Given the performance of these stocks into the withering selling over the past month, it is pretty obvious portfolio managers are using the massive drop to add to positions. These companies are dominating their respective technology silos and should continue to long after the coronavirus worries have left the center stage.
While seemingly just a suggestion to buy the FANG group yet again, these companies have little competition for the core businesses that lie under their corporate tents. Plus, they have the muscle to buy and to create organically their way into new arenas and to push away any competition that arises.
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