U.S. markets closed

BofA: IT Hardware Stocks Are Losing Appeal To Funds, But Apple Has Further Upside Potential

Shanthi Rexaline

Fund ownership of IT hardware stocks is touching historical lows, according to Bank of America Merrill Lynch, which cited its tracker of U.S. large-cap active fund manager holdings. 

The Analyst

Notwithstanding waning interest among fund managers, BofA's Wamsi Mohan maintained Buy ratings on the following stocks:

  • Apple Inc. (NASDAQ: AAPL)
  • IBM Common Stock (NYSE: IBM)
  • HP Inc (NYSE: HPQ)
  • TE Connectivity Ltd (NYSE: TEL)
  • NetApp Inc. (NASDAQ: NTAP)

The Thesis

Most of the drop in fund ownership of tech hardware stocks can be traced to a decline in Apple's relative holding weight, which fell from 75.1 percent in June 2017 to 72.1 percent in June 2018, Mohan said in a Friday note. (See Mohan's track record here.)

The analyst shared the following sector takeaways:

  • Based on the relative holding weight and the relative weighting to index by active fund managers, Apple, despite being one of the most widely owned tech stocks, saw its position size relative to the S&P 500 drop to a record low.
  • IBM's relative weighting has been consistently dropping and is approaching record lows.
  • HP, TE Connectivity, Hewlett Packard Enterprise Co (NYSE: HPE), NetApp and Amphenol Corporation (NYSE: APH) are relatively underweight but overowned.
  • Seagate Technology PLC (NASDAQ: STX), Western Digital Corp (NASDAQ: WDC) and Corning Incorporated (NYSE: GLW) are both underweight and underowned.
  • Nutanix Inc (NASDAQ: NTNX), Flex Ltd (NASDAQ: FLEX), TE Connectivity and Western Digital have the highest percentage of Buy ratings.
  • Teradata Corporation (NYSE: TDC), Seagate, Stratasys Ltd (NASDAQ: SSYS) and 3D Systems Corporation (NYSE: DDD) have the lowest percentage of Buy ratings.

See also: Loop Capital Models For 13% Upside In Apple, Speculates On 'Nirvana' iPhone Lineup


Source: BofA

Apple Poised For Continued Upside

Mohan forecast additional upside for Apple given its low average position. Apple's stock is poised for continued upside due to its multiyear revenue and gross profit dollar growth, along with its strong capital return, the analyst said. 

IBM Found Wanting In Position Size

BofA noted that IBM's relative weighting is at record low of 0.14 times, but ownership has ticked up to 20.8 percent. The firm sees increase in both ownership and relative weight to the index if the company shows improved performance in terms of pretax income in 2019, while also stemming its revenue-declining streak.

The Price Action

The SPDR S Tr/S&P Tecy HARDWARE E (NYSE: XTH) is up about 3.4 percent year-to-date.

Related Link: Goldman Sachs Adds Nutanix To Conviction List, Says Hardware Revenue Decision Is Misunderstood

Latest Ratings for AAPL

Date Firm Action From To
Jun 2018 Argus Maintains Buy Buy
May 2018 Maxim Group Downgrades Buy Hold
May 2018 Morgan Stanley Maintains Overweight Overweight

View More Analyst Ratings for AAPL
View the Latest Analyst Ratings

See more from Benzinga

© 2018 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.