The third quarter is already off to a hot start for stocks.
The stock market took investors on a wild ride in the first half of 2020. After a more than 30% drop during the first quarter, the S&P 500 rebounded in the second quarter with its best quarter since 1998. Analysts are anticipating horrendous second-quarter earnings numbers from many U.S. companies in the coming weeks, including about a 43% year-over-year drop in earnings per share for the S&P 500. But amid the market volatility, some companies are thriving. Here are Bank of America’s top eight stocks to buy in the third quarter.
Apple (ticker: AAPL)
You’d never know the world was in economic chaos throughout the first half of 2020 by looking at Apple’s stock. Apple shares have gained about 30% year to date and are trading at all-time highs ahead of the highly anticipated launch of 5G iPhones, expected in September. Analyst Wamsi Mohan says the 5G upgrade cycle will be a multiyear catalyst for Apple starting in the third quarter and will likely drive multiple expansion of earnings. Mohan is projecting 20% iPhone and wearables revenue growth in 2021. Bank of America has a “buy” rating and $390 price target for AAPL stock.
Fiserv provides financial services technology. Analyst Jason Kupferberg says the stock underperformed its peer group significantly in the first half of the year, but he is bullish on FISV in the third quarter for three reasons. First, the company’s Fintech segment is a defensive play, while its Acceptance segment is levered to an economic recovery. Second, he says Fiserv has exceptional 2021 earnings visibility. And finally, he says the stock’s valuation is extremely attractive at only about 17.3 times projected 2021 earnings. Bank of America has a “buy” rating and $120 price target for FISV stock.
Fortive Corp. (FTV)
Fortive produces industrial products and provides services in instrumentation, sensing, automation and other areas. Analyst Andrew Obin says recent software acquisitions Gordian, Accruent and Intelex have gross margins of greater than 70% and provide resilient revenue streams. In addition, he says the planned spinoff of the company’s Industrial Technologies segment should unlock value for shareholders. In the near term, Fortive should clear the low bar of second-quarter earnings expectations, Obin says. He also says margins should recover significantly in the second half of 2020 and into 2021. Bank of America has a “buy” rating and $76 price target for FTV stock.
Kraft Heinz Co. (KHC)
Kraft Heinz shares are down about 60% in the last five years. However, analyst Bryan Spillane says Kraft Heinz is a well-positioned self-improvement play heading into the second half of 2020. With the company priced at just 12.5 times earnings, Kraft trades at roughly a 40% discount to peers, Spillane says. He says KHC generates enough cash flow and has a strong enough balance sheet to maintain its 5% dividend, cover its capital spending plans and reduce its leverage over time. Bank of America has a “buy” rating and $38 price target for KHC stock.
L Brands (LB)
L Brands is the parent of Victoria’s Secret and Bath & Body Works, and the struggling stock is down about 80% in the last five years. Despite concerns over a secular decline in shopping mall retail, the L Brands sell-off is a buying opportunity, says analyst Lorraine Hutchinson. She says same-store sales have been up more than 20% in reopened Bath & Body Works stores, and L Brands is working to overhaul Victoria’s Secret in anticipation of a sale or spinoff. Bank of America has a “buy” rating and $25 price target for LB stock.
L3Harris Technologies (LHX)
L3Harris Technologies is a global aerospace and defense technology company. Analyst Ronald Epstein says the company is divesting noncore assets, returning cash to shareholders and providing superior solutions for its customers. L3Harris has potential for additional near-term cost-cutting, Epstein says, and second-quarter results will include important updates on the synergy opportunities of the L3 and Harris merger. Additional asset sales could also be bullish catalysts for the stock, given that the company has said it plans to offload up to 10% of revenue. Bank of America has a “buy” rating and $250 price target for LHX stock.
O’Reilly Automotive (ORLY)
O’Reilly Automotive is the second-largest U.S. auto parts retailer. Analyst Elizabeth Lane Suzuki says U.S. miles driven in April were down 40% year over year, but that decline was just 15% in May and 5% in June. Suzuki says there are several reasons to like O’Reilly, including the growing number of vehicles that are past warranty, the rising number of miles driven on those vehicles, the complexity of many of those vehicles, and the rise in extreme weather, which is hard on auto parts. Bank of America has a “buy” rating and $470 price target for ORLY stock.
Splunk is a software platform for collecting, storing and analyzing machine-generated data. Analyst Kash Rangan says the work-from-home environment has increased public cloud workload and increased demand for Splunk’s services. Rangan says Splunk should exceed its target of 40% compound annual recurring revenue growth through fiscal 2023. In addition, he says the company is on track to hit $10 billion in revenue and reach 25% free cash flow margins by fiscal 2027. Splunk’s earnings report, user conference, and analyst day event could all be third-quarter catalysts. Bank of America has a “buy” rating and $249 price target for SPLK stock.
Stocks to buy for the third quarter:
— Apple (AAPL)
— Fiserv (FISV)
— Fortive Corp. (FTV)
— Kraft Heinz Co. (KHC)
— L Brands (LB)
— L3Harris Technologies (LHX)
— O’Reilly Automotive (ORLY)
— Splunk (SPLK)
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8 Third-Quarter Stock Picks That Bank of America Loves originally appeared on usnews.com