Investing

BofA Securities Makes Huge End-of-Summer Changes to US 1 List

With earnings reporting for the second quarter all but over, and the summer starting to wind down, many of the top companies we follow on Wall Street are making some changes to the lists of their high-conviction stock picks for clients. With the market showing the potential for some sizable rotation, it makes sense to examine the lists and reposition as the rest of the year could have additional volatility, as the political and geopolitical cycle could prove to be very explosive components.

The research team at BofA Securities has made four changes to the firm’s US 1 list of top stocks to Buy. Two companies were removed and two new companies were added. The analysts also made changes to the weighting methodology and the committee process for the US 1 list during the most recent changes to the portfolio, so we have them again for review.

Going forward, the list will be weighted based on market capitalization and will allocate 2% for stocks with less than $100 billion market cap, 4% for stocks with $100 billion to $400 billion market cap, and 6% for any stocks with greater than $400 billion market cap. To the extent that any security selection causes the list allocation to exceed or fall short of 100%, this excess/shortfall will be allocated equally across all stocks in the list.

Here we cover the two new stocks that are added, and we also screened the US 1 list for three additional highest paying dividend stocks, as the two new additions also pay reliable dividends. While all five are outstanding ideas for investors, it’s important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Northrop Grumman

The company was ranked as one of the top five defense contractors by sales last year, and it makes its debut on the US 1 list. Northrop Grumman Corp. (NYSE: NOC) provides innovative systems, products and solutions in unmanned systems, cyber, C4ISR and logistics and modernization to government and commercial customers worldwide. It is also one of the companies profiting most from war.

The Aerospace Systems segment designs, develops, integrates and produces manned aircraft, unmanned systems, spacecraft, high-energy laser systems, microelectronics and other systems and subsystems.

The Information Systems segment offers advanced solutions for Department of Defense, national intelligence and federal civilian, state, international and commercial customers. It provides products and services primarily in the fields of command and control, communications, cyber, air and missile defense, intelligence processing, civil security, health information technology, and government support systems.

The Technical Services segment provides logistics, modernization and sustainment services, as well as other advanced technology and engineering services, including space, missile defense, nuclear security, training and simulation services.

Shareholders receive a 1.70% dividend. The BofA Securities price target for the shares is $450, and the Wall Street consensus target is $391.94. Northrop Grumman stock closed trading on Tuesday at $341.85 a share.

TE Connectivity

This somewhat lesser-known stock was also added to the US 1 list. TE Connectivity Ltd. (NYSE: TEL) is the world’s largest maker of passive electronic components (75% of sales) led by a leading share (20% to 25%) in connectors (50% of sales). The company’s biggest served markets have longer cycles, such as auto (30% of sales) and telecom equipment (19% of sales). TE Connectivity also produces components for telecom and energy networks (14% of sales) that protect/connect cabling.

The BofA team feels that the company has significant potential long-term benefit from secular growth in the automobile industry. As original equipment manufacturers continue to add features to make vehicles safer, greener and more connected, TE Connectivity should benefit from content growth. Strong cash flow, share buybacks and dividends should continue to provide valuation support.

The company posted strong results last month and the analysts noted this:

Fiscal third quarter results and the fiscal fourth quarter outlook highlighted operating margin strength driven by portfolio transformation actions. Management expects fiscal fourth quarter revenues to grow 10% quarter over quarter driven primarily by vehicle production recovery, while industry/communications remain stable. We reiterate Buy as we see strong growth post COVID while the company should benefit from secular content growth over the long-term.

Shareholders receive a 2.02% dividend. BofA Securities has a $105 price objective, well above the $98.57 consensus target. TE Connectivity stock closed at $95.04 on Tuesday.