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Bank of America's 8 Best Stocks to Buy in Q1

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Wayne Duggan
·5 min read
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Here are analysts' top stocks to buy in the first quarter.

The S&P 500 closed out 2020 at all-time highs on optimism surrounding additional government stimulus measures and a potential global economic rebound in 2021. Investors are mostly looking past horrible 2020 earnings numbers and focusing on the path forward for the economy, but there is still significant uncertainty surrounding when, if ever, certain businesses will fully recover to pre-crisis levels. Bank of America recently released its quarterly list of the top eight stocks to buy in the first quarter. These eight stocks are high-conviction investment ideas that have market-moving catalysts coming sometime in the next three months.

Citigroup (ticker: C)

Analyst Erika Najarian says Citigroup is a particularly attractive value stock within an already undervalued financial sector that is poised to outperform in 2021. Bank of America is projecting both a macroeconomic rebound and a rebound in 10-year Treasury yields to 1.5% in the second half of 2021, both of which are bullish for Citigroup. The stock is priced at just 85% of tangible book value, which Najarian says doesn't reflect its potential for roughly 10% normalized return on tangible common equity. Bank of America has a "buy" rating and $79 price target for C stock.

Foot Locker (FL)

Analyst Robert Ohmes says Foot Locker is a play on the strong performance of the Nike (NKE) product portfolio at a sharp valuation discount to Nike shares. Nike is making strategic exits from stores such as J.C. Penney, Belk and Dillard's (DDS), which should create gross margin tailwinds for Foot Locker as a key Nike strategic partner. In fact, Ohmes says 70% of Foot Locker stores are located within two miles of a competing store that is either closing or Nike is exiting. Bank of America has a "buy" rating and $55 price target for FL stock.

Kansas City Southern (KSU)

Analyst Ken Hoexter says Kansas City Southern is an under-the-radar growth story among Class I Railroad stocks. Kansas City Southern generated better than peer average carload growth in 11 out of the past 12 quarters heading into the fourth quarter of 2020. Hoexter says Mexican industrialization, energy reform and cross-border commerce will be tailwinds for Kansas City Southern. He is projecting $150 million in 2021 cost savings from the ongoing precision scheduled railroading initiatives. The company is also only modestly exposed to the challenged coal industry. Bank of America has a "buy" rating and $228 price target for KSU stock.

ServiceNow (NOW)

ServiceNow specializes in software-as-a-service applications focused on automating business processes and workflows. Analyst Brad Sills says ServiceNow is a top pick within the large-cap software group. He says the company's installed mid- and large-sized enterprise customers, its roughly 4,600 sales and marketing personnel and its robust suite of workflow automation offerings differentiate ServiceNow from its competitors. Sills is projecting long-term annual revenue growth of at least 25% and says the company has an opportunity to grow margins and free cash flow over time. Bank of America has a "buy" rating and $650 price target for NOW stock.

Occidental Petroleum Corp. (OXY)

Occidental Petroleum made an aggressive acquisition of Anadarko Petroleum Corp. in 2019. Its heavy debt load cost the company its investment-grade credit rating and forced Occidental into a dividend cut in 2020. The stock has dropped about 50% in the past year, but analyst Doug Leggate says the new and improved Occidental is a great low-value oil market recovery investment in 2021. Occidental's business is extremely leveraged to oil prices, but that 2020 headwind could switch to a tailwind in 2021 if oil prices continue to rise. Bank of America has a "buy" rating and $29 price target for OXY stock.

T-Mobile US (TMUS)

The acquisition of Sprint made T-Mobile a legitimate contender against U.S. telecom giants AT&T (T) and Verizon Communications (VZ). Analyst David Barden says T-Mobile will likely update investors on its Sprint synergy targets either during its fourth-quarter earnings call or its analyst day event, likely in February. In addition, Barden says investors should watch for management commentary on long-term subscriber growth and 5G strategy. He says the company's analyst day will likely be the biggest catalyst for the stock in the first quarter. Bank of America has a "buy" rating and $155 price target for TMUS stock.

Tapestry (TPR)

Tapestry is a specialty affordable luxury product retailer and the parent company of Coach, Kate Spade and Stuart Weitzman. Analyst Lorraine Hutchinson says Tapestry surprisingly recovered sales and expanded margins in a difficult retail environment in 2020. She says Coach and Kate Spade are excellent economic reopening plays in 2021. Handbag sales are highly exposed to vacations, weddings and in-office work, all of which should rebound this year. Hutchinson is projecting Tapestry will build upon its pre-crisis margins once the economic recovery hits full stride. Bank of America has a "buy" rating and $40 price target for TPR stock.

Raytheon Technologies Corp. (RTX)

Analyst Ronald Epstein is projecting mid-single-digit annual revenue growth for defense giant Raytheon Tech. He says Raytheon should outpace U.S. defense spending growth and generate dependable free cash flow for investors. Epstein says the company's high-quality aerospace business is well-positioned to benefit from widespread coronavirus vaccinations and a rebound in air traffic starting in the first quarter. Raytheon also has an opportunity for earnings multiple expansion as the economy recovers from the downturn, and airline maintenance demand could rebound in early 2021. Bank of America has a "buy" rating and $80 price target for RTX stock.

Bank of America's Q1 picks:

-- Citigroup (C)

-- Foot Locker (FL)

-- Kansas City Southern (KSU)

-- ServiceNow (NOW)

-- Occidental Petroleum Corp. (OXY)

-- T-Mobile US (TMUS)

-- Tapestry (TPR)

-- Raytheon Technologies Corp. (RTX)