The best stocks to buy by sector.
In an unpredictable stock market, one of the most powerful tools individual investors have at their disposal is diversification. Not only does diversification limit risk associated with any single sector, it also ensures that portfolios are exposed to the sectors leading the market at any given time. The Bank of America team regularly updates its US1 List of top stock picks in all the different market sectors. For investors looking to take a diversified approach to 2020, here’s a look at Bank of America’s single top stock pick in 10 stock market sectors based on upside to their 12-month price target.
Communication services: Walt Disney Co. (ticker: DIS)
Disney was Bank of America’s top communication services pick heading into 2019, and it has been a top performer year-to-date, gaining more than 34%. Much of the gains came after the highly anticipated Disney Plus streaming service launch in November landed more subscribers than anticipated. Analyst Jessica Reif Ehrlich says Disney’s guidance for between 60 million and 90 million Disney Plus subscribers by fiscal 2024 already looks conservative given the service added 10 million subs within roughly 24 hours of its launch. Bank of America has a “buy” rating and $168 price target for DIS stock.
Consumer discretionary: Advance Auto Parts (AAP)
Analyst Elizabeth Suzuki says auto parts retailers have the best fundamentals in the hardline retail group, a market sector that has been hammered in recent years by online competition. Suzuki says auto parts retailers like top pick Advance Auto are relatively insulated from e-commerce competition. In fact, she is forecasting Advance’s same-store sales growth will accelerate in 2020 driven by a rise in the number of cars on the road that are between six and 10 years old. Margins are also improving. Bank of America has a “buy” rating and $190 price target for AAP stock.
Consumer staples: Mondelez International (MDLZ)
Analyst Bryan Spillane says Mondelez deserves a premium valuation to U.S. food peers given its exposure to growth categories and geographies. In addition, Spillane is bullish on Mondelez’ cash flow and shareholder returns and says it could be a potential buyer in a consolidating industry. He says sales growth should drive double-digit EPS growth in coming years. Mondelez and Hershey Co. (HSY) are Spillane’s top food stock picks heading into 2020 due to their heavy exposure to snacking and their high-quality brands. Bank of America has a “buy” rating and $61 price target for MDLZ stock.
Energy: Diamondback Energy (FANG)
The energy sector lagged once again in 2019, but another OPEC production cut and positive early performance of the Saudi Aramco initial public offering have oil and gas stocks on Wall Street’s radar once again. Analyst Asit Sen says Diamondback Energy’s 2020 spending and production growth guidance are prudent given the difficult environment. Sen says Diamondback differentiates itself from peers in that it can pay its dividend and grow production more than 10% annually at crude oil prices of $45 per barrel. Bank of America has a “buy” rating and $181 price target for FANG stock.
Financials: Synovus Financial Corp. (SNV)
Synovus is a regional bank headquartered in Georgia with more that $30 billion in assets in the U.S. Southeast. Analyst Ebrahim Poonawala says Synovus management has done a tremendous job on a number of fronts in recent years, including improving efficiency, increasing capital return, de-risking the balance sheet and emphasizing businesses that could potentially deliver sustained revenue growth in the long term. As a result, Synovus’ return on assets has improved, and Poonawala says the stock’s valuation looks much more appealing. Bank of America has a “buy” rating and $42 price target for SNV stock.
Health care: Cigna (CI)
After reporting strong third-quarter numbers, Cigna management issued relatively conservative guidance for 2020, a starting point that analyst Kevin Fischbeck says leaves room for upside. Fischbeck says Cigna is on a trajectory for at least $20 in earnings per share in 2021. He says investors should start seeing 2020 returns on 2019 capital deployment, including share buybacks, debt paydown and synergies from the Express Scripts integration. Fischbeck says the best thing about the Express deal is the free cash flow it added to the mix. Bank of America has a “buy” rating and $258 price target for CI stock.
Industrials: Raytheon Co. (RTN)
Raytheon was also Bank of America’s top industrial sector pick heading into 2019, but a lot has changed since then. In June, Raytheon and United Technologies Corp. (UTX) announced an all-stock merger to create an aerospace and defense giant named Raytheon Technologies that is expected to generate $74 billion in annual revenue. Analyst Ronald Epstein says Raytheon’s recent Lower Tier Air and Missile Defense Sensor contract win demonstrates the competitiveness of Raytheon’s technology, and he says he’s bullish on the future Raytheon Technologies as well. Bank of America has a “buy” rating and $265 price target for RTN stock.
Information technology: Dropbox (DBX)
Dropbox missed out on the tech sector rally in 2019, but analyst Justin Post says 2020 will finally be the year Dropbox shares start to gain traction in the market. Post says Dropbox’s third-quarter user metrics were impressive. Despite raising prices in the quarter, Dropbox’s churn was below expectations and it added 400,000 net subscribers, beating consensus estimates. Post says subscriber growth could slow in 2020, but he predicts a rise in both average revenue per user and margins. Bank of America has a “buy” rating and $32 price target for DBX stock.
Materials: Berry Plastics (BERY)
Despite potential environmental and regulatory headwinds, analyst George Staphos says Berry Plastics’ market valuation currently reflects an overly negative outlook. Staphos says Berry is taking a more proactive approach to the environmental problem by introducing more sustainable products, such as lighter weight plastics and more recyclables. Berry completed a $4.3 billion buyout of RPC in June. Staphos says RPC synergies and a rebound in Berry’s health, hygiene and specialties and its engineered materials segments should be catalysts in fiscal 2020. Bank of America has a “buy” rating and $53 price target for BERY stock.
Real estate: Invitation Homes (INVH)
Invitation Homes is a single-family residential real estate investment trust. Analyst Jeffrey Spector says Invitation’s merger with Starwood Waypoint Homes gives Invitation’s world-class management team an extremely high-quality portfolio of assets. Spector says Invitation should improve both efficiency and margins in 2020. Spector is also bullish on single-family rentals in general, which are not experiencing the same oversupply risks as other real estate sectors. In addition, higher U.S. wages and home prices should boost demand for single-family rentals next year. Bank of America has a “buy” rating and $32 price target for INVH stock.
Top stock picks to buy from 10 sectors:
Communication services: Walt Disney Co. (DIS)Consumer discretionary: Advance Auto Parts (AAP)Consumer staples: Mondelez International (MDLZ)Energy: Diamondback Energy (FANG)Financials: Synovus Financial Corp. (SNV)Health care: Cigna (CI)Industrials: Raytheon Co. (RTN)Information technology: Dropbox (DBX)Materials: Berry Plastics (BERY)Real estate: Invitation Homes (INVH)