BofA Merrill Lynch's Subramanian: 2015 stock picks
SAVITA SUBRAMANIAN
HEAD OF U.S. EQUITY, QUANTITATIVE STRATEGY, BofA MERRILL LYNCH
2015 STOCK MARKET OUTLOOK:
Held back by a market that's no longer cheap, a likely rise in volatility and less stimulus from the Federal Reserve, the U.S. stock market will rise in 2015 but at a slower pace than recent years, predicts Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Merrill Lynch.
Subramanian's year-end 2015 price target for the broad Standard & Poor's 500-stock index is 2200, roughly 8% higher from Thursday's close of 2035. Two and a half weeks before the end of 2014, the market is on pace for its third straight year of double-digit gains for the first time since the 1990s.
Investors, she says, should expect a bumpier ride next year as the Fed gets set to start hiking short-term interest rates for the first time since 2006 — and the bull market nears its 6th birthday, which is more than a year longer than the average bull's lifespan.
"We found that bull markets don't necessarily die of old age, they die of euphoria — everybody 'going all-in' to equities — and I just don't think that we are there yet," she says.
BIGGEST RISK:
"If corporations go back into bunker mode and stop spending," that would hurt the economy, she warns.
TOP STOCK PICKS:
Exxon Mobil (symbol: XOM, Thursday close $89.20). It's not her favorite sector, but the oil giant is a "contrarian" pick, given its 3% dividend yield and its reputation for sailing through oil price volatility without major tumult. Another plus: The mutual fund community is 70% "underweight" Exxon, which reduces potential "selling pressure."
General Motors (GM, $32.19). Mega-cap automaker is inexpensive, pays out a sizable dividend and will benefit from new product launches and lower gas prices, which will spur consumers to trade up to larger SUVs and trucks.
Wal-Mart Stores (WMT, $83.83). High-quality, big-cap retail stock has big exposure to low-income consumers, who benefit most from lower oil and gasoline prices as it frees up more disposable income. The low-price retailer is a good "defensive" stock in the consumer discretionary sector.
General Electric (GE, $25.41). Founded more than 100 years ago, GE is built to last. It is a cheap stock that pays out a 3%-plus annual dividend. GE, part of the S&P 500 industrial sector, is likely to deliver double-digit earnings growth through 2016. Cost savings from restructuring will help.
Intel (INTC, $36.70). This "old tech" stalwart has plenty of net free cash. Returning cash to shareholders is part of the chipmaker's corporate ethos. It will benefit from a stabilizing PC market and long-term growth in servers. Intel is well-positioned to take advantage of trends in Big Data/Cloud computing.
Subramanian does not own stocks cited in her personal account. BofA Merrill Lynch has investment banking/client relations with all companies.
FAVORITE SECTOR:
Technology. "Old-tech names — your Microsofts or Apples, your IBMs and Intels ... are undervalued and have finally realized that they can return cash to shareholders without the penalty of being (perceived as anti-growth)," she says. "These stocks are turning into very interesting cash-distribution vehicles, which I think matters in a low-yield world."
INVESTMENT THEMES WORTH BETTING ON:
• Large-cap stocks over small-company stocks. As the Fed dials back its easy-money policies, small-caps will lose their "tailwind of cheap capital," which paves the way for large stocks to retain market leadership for a second straight year.
• Delight in dividend growers. In a world of low interest rates, buying stocks that increase their dividends each year are better bets than those that simply sport a fat yield. "The world is looking for income that is likely to grow rather than shrink," she says.
