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

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. AAPL
• IBM Common Stock IBM
• HP Inc HPQ
• TE Connectivity Ltd TEL
• NetApp Inc. 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 HPE, NetApp and Amphenol Corporation APH are relatively underweight but overowned.
• Seagate Technology PLC STX, Western Digital Corp WDC and Corning Incorporated GLW are both underweight and underowned.
• Nutanix Inc NTNX, Flex Ltd FLEX, TE Connectivity and Western Digital have the highest percentage of Buy ratings.
• Teradata Corporation TDC, Seagate, Stratasys Ltd SSYS and 3D Systems Corporation 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 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