The Q3 earnings outlook has been steadily improving since the start of the quarter, driven mostly by a better-than-expected economic recovery. This is especially true as S&P 500 earnings are expected to decline 22.8% on 2.9% lower revenues. The earnings projection reflects an improvement from the 26.5% earnings decline expected at the start of July and follows the 32.4% earnings drop in Q2 when economic and business activities came to a halt as a result of the pandemic-driven lockdowns.

Of the 16 Zacks sectors, 14 are expected to experience earnings declines. The two sectors that are expected to lose most money in Q3 (year-over-year declines of 100% or more) are transportation (122.5%) and energy (102.2%). Construction and medical are the only sectors with respective earnings growth expectation of 11.5% and 0.6% relative to the year-ago period. Also, utilities and technology are expected to see a modest decline of 3.4% and 4%, respectively (read: ETFs to Gain as U.S. New Home Sales Hit 14-Year High).

Given this, we have highlighted one ETF and one stock from these four sectors that could make great plays as the earnings season unfolds. These ETFs and stocks have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).

For stocks, we have added the extra criteria of a VGM Score of B or better and a positive Earnings ESP. The combination of a Zacks Rank #3 or better and a positive ESP increases the odds of an earnings beat by 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Construction

This sector has gained momentum from homebuilders, which has emerged strongly from the COVID-19 pandemic. Tumbling mortgage rates and higher demand for new homes are driving homebuilders higher. This is because record-low mortgage

Healthcare stocks have gained nearly 18.0% in the first nine months of this year, compared to the S&P 500 index’s gain of 3.2% over the same time frame. While the coronavirus pandemic has been disruptive, there are pockets within the healthcare sector that have benefited. Some companies had benefited from increased sales of over-the-counter drugs and personal care items as people stocked up. However, sales were simply brought forward and may level off with a slowdown in sales going forward.

There has been a sharp drop in doctor visits and delays in elective surgeries. In addition, fewer medical visits translate into fewer diagnostic tests and drug prescriptions. However, as the economy slowly reopens, healthcare companies have seen some of this reverse and the earnings outlook has improved. Some companies within the biotech and pharmaceutical industries may benefit if they produce tests and vaccines for the virus, but at high cost and potential delays of other trials.

In terms of risks, healthcare reform and prescription drug prices have become a focus during the run-up to the 2020 election, triggering an increase in volatility.

Some growth stocks deserve their high valuations, while many do not. Partha Mohanram, who holds the John H. Watson chair in value investing and is area coordinator of accounting at Rotman School of Management, University of Toronto, developed a scoring system to help separate the winners from the losers among stocks trading with high price-to-book-value (P/B) ratios. The grading system looks at company profitability and cash flow performance, adjusts for likely mistakes due to naive growth projections and considers the impact of conservative accounting policies to form a growth score, or G-score.

Mohanram’s work identified fundamental factors that are useful when studying growth companies. Investors tend to naively extrapolate current fundamental growth stocks or even ignore the implications

Written by Nick Ackerman, co-produced by Stanford Chemist

The Calamos Strategic Total Return Fund (CSQ) offers investors an attractive blend of convertible exposure and common equity exposure. Equities dominate the largest allocation of the fund’s portfolio, led by the tech sector. Though the allocation to tech isn’t egregiously large overall. In fact, the allocation of tech is smaller than that of the S&P 500. The strong returns since the GFC have also given investors a few distribution boosts since then, with the last dividend increase happening earlier this year.

CSQ seeks “total return through a combination of capital appreciation and current income.” Its investment strategy is quite simple: “investing in a diversified portfolio of equities, convertible securities and high yield corporate bonds.”

Essentially, the investment managers can posture the portfolio in whatever particular composition they deem the most attractive. That can result in some superior returns if they get it right. While the opposite is just as true, the current management team has been able to deliver more than reasonable returns. Calamos also has experience in the convertible space, with its line-up of CEFs offering exposure to these investment instruments. That being said, CSQ is one of their funds that actually has the least exposure to this space.

Convertible stock can be beneficial for some investors, as they have features of both equities and fixed-income. This means they can also be potentially more volatile than regular fixed-income instruments, as the conversion feature results in movement based on the equity of a company. However, that also potentially allows for upside when a conversion takes place – all the while collecting a fixed interest rate on their holding. Typically, retail investors do not get exposure to these investments, as they aren’t traded on exchanges. They are level 2 assets though, so liquidity