Bank of America shares 12 under-owned stocks likely to soar on earnings this quarter with investing conditions ripe for the picking

  • According to Bank of America's equity and quant strategy team, 18% of the S&P 500 index components are reporting earnings this week. 
  • The team examined eight different earnings factors and forecasted a 5% upside surprise for the S&P 500 this quarter.  
  • It also screened the S&P 500 for stocks under BofA coverage that are most likely to beat earnings expectations and under-owned by active fund managers.
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With 18% of the S&P 500 companies reporting this week, third-quarter earnings season is ramping up and in full swing, according to Bank of America's earnings tracker. 

Savita Subramanian, equity and quant strategist at Bank of America, sees a bright quarter ahead for corporate America.

Subramanian and her team took into consideration eight different factors including:

  • (1) the economic surprise index
  • (2) the relationship between GDP and EPS
  • (3) dispersion of estimates
  • (4) top-down EPS forecasts
  • (5) the average post-Regulation Fair Disclosure third-quarter beat
  • (6) Bank of America analyst forecasts for the quarter
  • (7) the average beat when estimates rose into earnings, and
  • (8) early reporters' 11% plus average beat

Their conclusion is a 5% upside surprise for the benchmark S&P 500 this quarter. 

"With better macro data and strong results from early reporters, we forecast a solid beat this quarter of 5% or $34.50 (-18% YoY). A 46% bounce in average oil prices from 2Q, strong consumption and manufacturing trends, and a weakening USD all point to a healthy recovery in earnings in 3Q," she wrote in a research note on October 12.

However, the reduced benefits of stimulus and a surge in COVID cases spell a more cautious outlook going forward, she said, noting that current consensus points to earnings improving to -14% year-over-year in the fourth quarter. 

What to buy, what to sell 

Despite the overall negative earnings growth, there are still opportunities for investors to net positive gains. 

The team looked into EPS revisions, sales revisions, and guidance as well as the ratio of positive to negative surprises in the previous quarter for 11 sectors. 

The end result, which is displayed in the chart below, suggests that investors own consumer staples and healthcare while avoiding utilities and energy stocks in the third quarter. 

Subramanian also points out that the earnings season marks a good time for stock picking. 

"For short-term investors, stock differentiation is heightened during earnings season, particularly the busiest reporting days," she said in the note. "This quarter, the busiest days fall the last week of October."

As such, the team screened the S&P 500 for stocks under the bank's coverage that are most likely to beat or miss earnings expectations. 

It factored in Bank of America's EPS and sales estimates versus consensus estimates, last quarter's results, and fundamental opinions from BofA analysts.

To further refine the screen, the team flagged stocks expected to beat earnings but are underweight by active fund managers. 

The 12 stocks are listed below in increasing order of active fund ownership. 

12. IPG Photonics Corporation

Ticker: IPGP

Sector: Information technology

Market cap: $9.83 billion 

Relative weight (vs. S&P 500) in fund holdings: 0.35

 

11. Procter & Gamble Company

Ticker: PG

Sector: Consumer staples

Market cap: $361.32 billion

Relative weight (vs. S&P 500) in fund holdings: 0.35

10. CF Industries Holdings

Ticker: CF

Sector: Materials

Market cap: $6.29 billion 

Relative weight (vs. S&P 500) in fund holdings: 0.37

9. Kimberly-Clark Corporation

Ticker: KMB

Sector: Consumer staples

Market cap: $52.56 billion 

Relative weight (vs. S&P 500) in fund holdings: 0.43

8. Hologic

Ticker: HOLX

Sector: Health care 

Market cap: $17.41 billion 

Relative weight (vs. S&P 500) in fund holdings: 0.44

7. CDW

Ticker: CDW

Sector: Information technology

Market cap: $18.73 billion 

Relative weight (vs. S&P 500) in fund holdings: 0.55

6. O'Reilly Automotive

Ticker: ORLY

Sector: Consumer discretionary

Market cap: $34.77 billion 

Relative weight (vs. S&P 500) in fund holdings: 0.57

5. Advance Auto Parts

Ticker: AAP

Sector: Consumer discretionary

Market cap: $10.77 billion 

Relative weight (vs. S&P 500) in fund holdings: 0.63

4. Western Union Company

Ticker: WU

Sector: Information technology

Market cap: $9.12 billion 

Relative weight (vs. S&P 500) in fund holdings: 0.69

3. SVB Financial Group

Ticker: SIVB

Sector: Financials

Market cap: $14.21 billion 

Relative weight (vs. S&P 500) in fund holdings: 0.76

2. Deere & Company

Ticker: DE

Sector: Industrials

Market cap: $75.61 billion 

Relative weight (vs. S&P 500) in fund holdings: 0.85

1. DuPont de Nemours

Ticker: DD

Sector: Materials 

Market cap: $43.64 billion 

Relative weight (vs. S&P 500) in fund holdings: 0.91

Get the latest Bank of America stock price here.

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