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Why Underweight Stocks Will Continue To Outperform Overweight Stocks

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  • BofA Merrill Lynch’s Savita Subramanian said that a midcap bubble seems to be forming, with midcaps now trading near a record premium to large caps.

Analyst Savita Subramanian wrote, “Buying the ten most underweight stocks and selling the ten most overweight stocks by large cap active fund list as of 12/2014 has produced a spread of 10ppt YTD, outperforming the average long-short equity hedge fund performance of -2bp.”

Among the top ten are NetApp Inc. (NASDAQ: NTAP), Texas Instruments Incorporated (NASDAQ: TXN) and Adobe Systems Incorporated (NASDAQ: ADBE), while among the bottom ten are Hewlett Packard Enterprise Co (NYSE: HPE) and CSRA Inc (NYSE: CSRA).

This strategy has generated positive spreads consistently over the past several years, with outflows from active to passive. This could continue, Subramanian said, explaining that passive funds comprise merely about one-third of the US large cap space.

The analyst stated that active managers had increased their exposure to cyclicals sectors’ allocations, possibly in view of the first Fed rate hike in a decade. The biggest upticks were in Energy, Discretionary and Tech. She added, “Financials has moved from a chronic underweight to neutral, pushing it to a bullish extreme…Energy is still the most hated relative to history.”

Subramanian believes that a midcap bubble is in the making, with mid-caps now trading near a record premium to large caps.

For 2016, the analyst expects underweight stocks to continue to outperform overweight stocks.

Buy-Rated, U/W Stocks

  • McDonald's Corporation (NYSE: MCD)
  • Exxon Mobil Corporation (NYSE: XOM)
  • NextEra Energy Inc (NYSE: NEE)
  • Ford Motor Company (NYSE: F)
  • AT&T Inc. (NYSE: T)
  • T. Rowe Price Group Inc (NASDAQ: TROW)
  • Perrigo Company plc Ordinary Shares (NYSE: PRGO)
  • Phillips 66 (NYSE: PSX)
  • Skyworks Solutions Inc (NASDAQ: SWKS)

Underperform-Rated O/W Stocks

  • Chipotle Mexican Grill, Inc. (NYSE: CMG)
  • Monsanto Company (NYSE: MON)
  • Cummins Inc. (NYSE: CMI)
  • Mead Johnson Nutrition CO (NYSE: MJN)
  • American Express Company (NYSE: AXP)
  • Viacom, Inc. (NASDAQ: VIAB)
  • General Mills, Inc. (NYSE: GIS)
  • Micron Technology, Inc. (NASDAQ: MU)
  • Bed Bath & Beyond Inc. (NASDAQ: BBBY)
  • Corning Incorporated (NYSE: GLW)

Latest Ratings for NTAP

DateFirmActionFromTo
Apr 2017JMP SecuritiesUpgradesMarket UnderperformMarket Perform
Feb 2017William BlairUpgradesUnderperformMarket Perform
Feb 2017PiperJaffrayUpgradesNeutralOverweight

View More Analyst Ratings for NTAP
View the Latest Analyst Ratings

Posted-In: BofA Merrill Lynch Savita SubramanianAnalyst Color Long Ideas Short Ideas Reiteration Analyst Ratings Trading Ideas

 

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