BofA's Top Pick in All 11 Stock Sectors

After the debacle in equity markets last year, the first couple of trading days of the new year offer a chance to try to get back some of the old mojo. Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, and her team have just released their 11 stock picks for 2023, one in each of the S&P sectors.

2022 was not exactly a banner year for BofA’s choices. Just four of their 11 picks for the past year outperformed relative to the sector average: BorgWarner, Exxon Mobil, Mondelez and Welltower.

Of the seven stocks that performed worse than the sector average, Eastman Chemical, F5 and NRG Energy were the double-digit underperformers.

The analysts outlined the bases for their 2023 choices:

We select these stocks primarily based on alignment with our 2023 themes … including quality, value, free cash flow generation, domestic vs. global exposure, dividend growth potential, and we looked for companies with earnings resilience given the expected recession – either from top-down strength (e.g., capex/automation beneficiaries) and/or margin stability. We also take into account crowding risk, BofA analysts’ earnings outlook vs. consensus, ESGMeter and other fundamental, statistical and technical factors.

The following table shows how the 11 sectors performed in 2022, BofA’s 2022 sector pick, the sector pick’s return for the year, and the 2023 sector pick, along with its return in 2022.

Sector 2022 Sector Return 2022 Pick 2022 Return 2023 Pick 2022 Return
Comm Svcs -36.20% Disney -43.90% Fox Corp. -16.61%
Cons Disc -65.50% BorgWarner -9.20% Tractor Supply -9.18%
Cons Stpls -2.61% Mondelez 2.90% Walmart -0.46%
Energy 62.50% Exxon 87.40% Exxon 87.40%
Financials -12.34% Wells Fargo -11.90% Arch Capital 41.24%
Health Care -5.80% CVS Corp. -7.60% Humana 11.15%
Industrials -8.08% Eaton -7.20% Honeywell 4.90%
Technology -31.55% F5 Inc. -41.40% Analog Devices -1.08%
Materials -11.51% Eastman Chemical -30.40% Mosaic 12.80%
Real Estate -25.55% Welltower -21.20% Welltower -21.20%
Utilities 1.65% NRG Energy -23.50% Duke 2.03%

Subramanian and her team at BofA also made a few specific comments about each of their 2023 picks.

Fox Corp. (NASDAQ: FOXA) – “Old” media with secular (sports betting) tailwind, improving culture score post-controversy, in our Low Price (recovery) screen

Tractor Supply Co. (NASDAQ: TSCO) – Quality (A+), healthy balance sheet, domestic sales, positive revisions and preservation expectations, div. growth, neglected by active, High ESGMeter

Walmart Inc. (NYSE: WMT) – Consumer trade-down beneficiary, High Quality (B+), low leverage, High ESGMeter, stagflation beneficiary, neglected by [long-only investors] and HFs

Exxon Mobil Corp. (NYSE: XOM) – Still underweight by [long-only investors) (0.4x), higher oil beta than CVX, strong FCF yield, attractive div. yield (3.4%), High ESGMeter

Arch Capital Group Ltd. (NASDAQ: ACGL) – Benefits from falling interest rate volatility, High ESGMeter In our Alpha Surprise Screen (inexpensive, out-of-consensus stocks)

Humana Inc. (NYSE: HUM) – High Quality (A-), pure domestic, High ESGMeter, positive EPS revisions, accelerating EPS growth, relatively recession resistant

Honeywell International Inc. (NYSE: HON) – Automation beneficiary, High Quality (A-), High ESGMeter, IRA/decarbonization beneficiary

Analog Devices Inc. (NASDAQ: ADI) – Labor automation beneficiary, strong free cash flow generator, Quality (A- ) & Value (~20% discount to sector)

Mosaic Co. (NYSE: MOS) – Pure-play fertilizer company amid a tight potash market, strong FCF/EV (16%), High ESGMeter

Welltower Inc. (NYSE: WELL) – Senior housing REIT set to recover from COVID; senior housing supply will likely remain muted; Quality (B+), healthy div. yield (3.4%), High ESGMeter

Duke Energy Corp. (NYSE: DUK) – Defensive dividend yield (3.9%), Quality (B+), 50% underweight by active [long-only investors], High ESGMeter

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