BofA's Stock Picks For Income Funds In 'Extremely Volatile' Earnings Season

COVID-19 has upset the earnings momentum of S&P companies, which were experiencing strong profit growth until the pandemic struck. Even in this bleak scenario, there are certain stocks that offer enhanced buying opportunities, according to BofA Securities analyst Vivek Arya.

Semis Could Fill The Void

A large group of companies cutting across industries are buckling under the financial strain engendered by the COVID-19 crisis and are either eliminating or reducing dividend payouts, Arya said in a Monday note.

The semiconductor stocks could fill the void due to their strong balance sheets and exposure to "more resilient parts of the global economy" such as PC, cloud computing and broadband infrastructure, the analyst said.

See Also: Nvidia, Marvell, Monolithic Are Oppenheimer's Top Picks Ahead Of Semiconductor Earnings

Broadcom, Intel Compelling Candidates

Intel Corporation INTC and Broadcom Inc AVGO, which are currently underweighted in income funds, are compelling candidates for these funds, Arya said.

Income funds are those which focus on generating regular income for investors by investing in high-dividend stocks and debt instruments that fetch interest income.

Both Broadcom and Intel possess above-SPX dividend yields, solid FCF, low PE multiples and a record of consistent dividend growth, the analyst said. 

Notwithstanding investor concerns about Broadcom's large debt pile, history of large M&A deals and controversial foray into infrastructure software, the analyst said he likes Broadcom due to its "best-in-class" 71%-plus gross margin.

Intel, though plagued by concerns surrounding its market share loss to Advanced Micro Devices, Inc. AMD, is also an ideal candidate due to its strong incumbency, breadth of portfolio and the expanding size of the compute market, he said. 

Other Interesting Candidates

BofA sees Skyworks Solutions Inc SWKS, Applied Materials, Inc. AMAT and Lam Research Corporation LRCX as other candidates that offer attractive but slightly lower dividend yields, solid FCF and low PE multiples.

"The upcoming earnings season is likely to be extremely volatile (weak Q2 outlooks) and could provide enhanced Buy opportunities in our view," Arya said. 

Semis Traditionally Underweighted

The weighting of S&P 500 semi/semiconductor equipment stocks in income funds is relatively low compared to the rest of sector holdings, Arya said.

Within the S&P 500 semiconductor stocks, Maxim Integrated Products Inc. MXIM, KLA Corp KLAC Texas Instruments Incorporated TXN and Analog Devices, Inc. ADI have the highest weighting in income funds, the analyst said. 

Among semiconductor companies with at least a 2% dividend yield, Intel and Broadcom have the lowest weighting, he said.

BofA's Ratings, Price Targets

• Intel: Buy/$70
• Broadcom: Buy/$305
• AMD: Buy
• Skyworks: Buy/$110
• Applied Materials: Buy/$60
• Lam Research: Buy/$325
• Maxim Integrated: Underperform/$53
• KLA Corp: Buy/$185
• Texas Instruments: Buy/$120
• Analog Devices: Buy/$108