Bank Of America's Top Buys: 3 Potential Longs, 2 To Avoid

by: Rash Menaria

Bank of America Corporation Corp. (NYSE:BAC) is an American multinational bank and financial holding company. Its Global Wealth and Investment Management division is one of the top ten largest U.S. wealth managers, with over $500 billion in assets. Bank of America made over 6000 new and additional equity purchases last quarter, according to its latest 13F filing. However, the biggest buys among those represent high level of conviction and are definitely worth a look. The following is a list of some of its top buys from the last quarter.



Shares Bought Last Quarter

Exxon Mobil Corporation



Microsoft Corporation



Intel Corporation



EMC Corporation



Dell Inc.



Source:13F filing

I like Microsoft, Intel and EMC Corp. as prospective long candidates among the above stocks. However, I would like to avoid Exxon and Dellת and believe they can see some downside in the near to medium term.

EMC Corporation is one stock a lot of hedge funds are bullish about and it hasn't disappointed investors so far in 2012, with ~35% YTD gains. EMC has strong fundamentals and it reported impressive profitability across all its business segments in the last quarter. Going forward, IT spending by various companies is expected to be a primary growth driver for EMC. For 2012, EMC is expecting a modest 3-4% yearly growth in IT budgets. I believe this guidance is conservative given the management's history. While eurozone IT spending is expected to be flat, I am of the opinion that emerging markets in Latin America and Asia could very well grow above expectations. Data growth and virtualization needs are the key areas which are expected to outgrow the overall IT industry spending.

EMC is the market leader in the storage space, with over 25% of the market share. There is further room for growth as the proliferation of structured and unstructured data is expected to drive the demand in storage capacity. Increased Data center capex by companies such as Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Facebook (NASDAQ:FB) indicate a positive trend in cloud computing and related services.

After significant product and channel investments in the past year, EMC's growth will also benefit from product refreshes in all of its segments and new product introductions. EMC has established a stronghold in all the market segments in enterprise storage, with VMAX gaining traction in the high end. Similarly VNX replaced the legacy CLARiiON systems in the mid-range markets, while VNXe is expected to help expand its footprint in lower-end markets. Further, EMC officially released its server flash product VFCache (dubbed Project Lightening) in the first week of February. I believe this is another potential growth opportunity for EMC which it can utilize by integrating it with its existing hardware and software solutions including VMware.

EMC's product breadth with continued updates and market leadership in storage provides a strong foundation for a healthy growth in 2012. I recommend a buy on the stock from the near to medium term perspective.

Microsoft Corp. has seen a positive breakout on the upside from its last 2-year trading range. It is currently trading at a forward P/E of 10x. I believe Microsoft is a good medium-term investment. Its cash cushion limits the downside, as well as enables it to make opportunistic acquisitions. In addition, Microsoft is also taking a lot of new initiatives, which can drive meaningful growth over the next few years. Some of the major catalysts for the stocks are the Windows 8 launch, Office 365 gaining traction and a successful adoption of Nokia (NYSE:NOK) WP7 phones. I think Microsoft offers an attractive risk/reward for investors who can hold the stock for one year.

Intel Corp. is the world's largest supplier of semiconductor chips. The company designs and manufactures microprocessors, boards, and semiconductor components that are used in computers, servers, and networking and communication products. The company is the world's largest supplier of microprocessors, with a worldwide market share of more than 75%.

Intel reported good Q4 results and gave better-than-expected guidance for 2012. The Enterprise and emerging market strength pushed its PC sales while strong data traffic drove Data Center revenue. Going forward, improving trends in Cloud and High Performance Computing are expected to drive server processor growth. The company's recent QLogic acquisition has increased its breadth of product line and strengthened its position in the super computing market.

Intel's Data Centre Capex guidance further supports the server processors' growth and upside potential to its margins in 2012. With new product cycles (Ivy Bridge, Romley and Medfield) and investments in its manufacturing and R&D capabilities, Intel is expected to gain market share against its competitor AMD.

Intel is committed to returning cash to its shareholders with a healthy 3.1% dividend yield and $4 billion in stock repurchases last year. It has authorization for a further $10 billion repurchase. Even with modest PC trends, the server market growth provides with considerable upside potential for its near-term earnings and multiple expansion.

Exxon Mobil Corporation is an American multinational oil and gas company. It is the world's largest publicly traded oil company. It engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas and petroleum products.

Exxon reported disappointing Q4 results, with an EPS well below the consensus estimates, after accounting for the one time asset sale gain. Production fell by 9% y-y, and upstream revenues missed the market expectations due to disappointing volumes. Even downstream and chemicals businesses reported earnings below expectations.

Exxon is the world's largest gas producer. Despite a bleak natural gas outlook in the U.S, XOM continues to be bullish on natural gas demand, as is evident from its production increase in Q4 2011 and also by its most recent acquisition of XTO Energy, a natural gas company. At a time when its competitors Chesapeake (NYSE:CHK) and Conocophillips (NYSE:COP) have announced natural gas drilling cuts, XOM has continued to look for growth in natural gas production. While this move clearly points to the company's approach towards developing a long term resource, it is expected to affect the near term earnings potential. Given the fact that XOM trades at a premium to its peers and its near term headwinds, I expect its stock to see a correction in the near term. I have recently written a fairly detailed article on Why You Should Avoid Exxon Despite Surging Oil Prices. Please refer it for more details on my short thesis.

Dell Inc. has garnered a lot of investor attention off late. Its stock saw 25% gains since the beginning of 2012 till February 21st, when it announced its financial results for its F4Q2012. The earnings results were mixed. However, the real disappointment came in the form of Dell's revenue guidance for April quarter which was down 7% q-q, much below consensus estimates. Further, it was disappointing that Dell did not provide FY2013 revenue guidance given uncertain demand due to macro uncertainty and continuing revenue pruning in certain segments.

I am bearish on Dell despite its undemanding valuations. Dell's core PC consumer business is facing a secular headwind from increasing adoption of tablets. Although Dell is trying to focus on higher margin IT Services, software and data center businesses it lacks presence and technological expertise when we compare it with other companies in the space.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.