These 'high quality compounders' are Bank of America's top picks ahead of second quarter earnings

Published Sat, Jul 15 20237:05 AM EDT

Analysts' at Bank of America have named a host of stocks that are poised to outperform heading into second earnings season. The bank said this week there are several "high quality" buying opportunities that aren't getting enough investor attention. CNBC Pro combed through the top Bank of America research to find analysts' favorite ideas as earnings releases ramp up. They include: Mondelez, SolarEdge , Rollins, Thomson Reuters and Broadcom. Rollins The pest control industry is poised to explode, according to analyst Jason Haas and that bodes well for shares of Rollins, which touched an all-time high on Friday. Bank of America recently initiated coverage of the stock with a buy rating, calling Rollins "a high-growth compounder through economic cycles." Haas listed several reasons for his bullishness on the stock. They include climate change, human population migration to warmer climates and consumers shifting away from a do-it-yourself pest control model. Rollins is also "highly recession resilient with 80% of revenue recurring," BofA said. Shares are up 22% this year and Haas has a price target of $49 per share. "We see limited risk to Rollins' growth trajectory — from a soft housing market, recession, competition, or weather — and therefore believe the stock deserves a premium multiple, " Haas said. Rollins is scheduled to report earnings later this month. SolarEdge Shares of the solar company are down 3% this year, but investors should stay calm, BofA says. Analyst Julien Dumoulin-Smith said in a recent note that the setup heading into the company's earnings in early August looks "healthy." "We model SEDG at the top end of revenue and [gross margin] guidance in 2Q23, driven by volumetric strength and price resiliency, despite investor concerns," he wrote. Dumoulin-Smith acknowledged that consensus expectations call for flat U.S. residential growth as 2023 unfolds, but urged clients to look at the bigger picture. Europe is firing on all cylinders and is driving the stock's fundamentals right now, he added. "We argue these concerns seem misplaced, and point to EBITDA acceleration in 2H23, driven by compounding operating leverage and further commercial & industrial and storage deployments," he said. Plus, SolarEdge remains well positioned as an Inflation Reduction Act beneficiary. "Despite lofty growth targets, we remain confident in SEDG's ability to compete in these markets, given its technological value proposition and 5-10 year track record," Dumoulin-Smith wrote. Thomson Reuters Analyst Heather Balsky is doubling down on shares of the data analytics, news and information company ahead of its earnings report in early August. Not only is Balsky expecting major sales acceleration in the months ahead, but Thomson Reuters will be a key player in generative AI, she said. Thomson's brand and content boasts a "competitive moat and advantage," BofA said. "It has opportunities to expand its Big 3's (legal, tax & accounting, corporate) total addressable market, improve retention, and boost cross-selling," she added. The company is also well-capitalized, Balsky says, and has "excess cash to go towards a mix of M & A, return of capital transactions, and share buybacks." The stock is up 12% in the U.S. this year with plenty more room to run, according to Balsky. "We are bullish on Thomson Reuters, which we see as an attractively priced defensive compounder," she said emphatically. Broadcom "Long-term EPS compounder with best-in-class [free cash flow] ... .Development of the AI market is still in the early stages, but AVGO AI-centric sales already robust, expanding from 10% of semis business in FY22. ... .All-in, AVGO's unique blend of stable/growth assets should more than help the company deliver best-in-class 50% FCF margin, 3%+ div yield, and provide potential upside from share returns. Trading at just 17x-18x our CY24 EV/FCF, we view Broadcom as one of the most attractive 'AI value' opportunities in semis." SolarEdge "Despite recent underperformance, 2Q setup looks healthy. .... .We model SEDG at the top end of revenue & GM guidance in 2Q23, driven by volumetric strength & price resiliency, despite investor concerns. ... We argue these concerns seem misplaced, & point to EBITDA acceleration in 2H23, driven by compounding operating leverage & further commercial & industrial and storage deployments. ... .Despite lofty growth targets, we remain confident in SEDG's ability to compete in these markets, given its technological value proposition and 5-10 year track record." Mondelez "At its 2022 Investor Day MDLZ management revealed the next iteration of its strategy. The high-level view on shareholder returns over time are similar to what CEO Dirk Van de Put outlined when he took over in 2018. MDLZ consistently compounding total shareholder returns supported by a combination of sales/profit growth, organic/inorganic capital deployment & returning cash to shareholders via share repurchase and dividend increases. The company is, in our view, better positioned to generate faster sales growth than was possible 5 years ago." Thomson Reuters "It has opportunities to expand its Big 3's (legal, tax & accounting, corporate) total addressable market, improve retention, and boost cross-selling. ... .We view its proprietary content and trusted brand as a competitive moat and advantage. ... . We expect excess cash to go towards a mix of M & A, return of capital transactions, and share buybacks. ... .We are bullish on Thomson Reuters, which we see as an attractively priced defensive compounder." Rollins "A high-growth compounder through economic cycles. ... .Buy today for recession-resiliency, margin expansion plan. ... .Rollins is highly recession resilient with 80% of revenue recurring. ... .We see limited risk to Rollins' growth trajectory — from a soft housing market, recession, competition, or weather — and therefore believe the stock deserves a premium multiple."