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.
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 rates are encouraging people to buy more homes and have made refinance cheaper. The trend is likely to continue at least this year on the Fed’s super easy money policy.
iShares U.S. Home Construction ETF ITB: This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $2.4 billion, it holds a basket of 46 stocks with heavy concentration on the top two firms. The product charges 42 bps in annual fees and trades in heavy volume of around 3 million shares a day on average. It has a Zacks ETF Rank #3 with a High risk outlook (read: 4 Best S&P 500 Sectors of Q3 and Their Top ETFs).
Meritage Homes Corporation MTH: It is one of the leading designers and builders of single-family homes. The stock has a Zacks Rank #1 (Strong Buy) and an Earnings ESP of +4.30%. The Zacks Consensus Estimate for the to-be-reported quarter has been revised upward by 10 cents over the past 30 days and has expected 49.5% earnings growth. Additionally, the company delivered a positive four-quarter earnings surprise of 39.99%, on average, and is scheduled to report earnings on Oct 21. You can see the complete list of today’s Zacks #1 Rank stocks here.
The medical sector has been performing well driven by the progress in the development of a coronavirus vaccine or treatment, and waves of mergers and acquisitions (read: Top-Performing Biotech ETFs Amid the Coronavirus Crisis).
iShares U.S. Healthcare ETF IYH: This fund, which holds 122 stocks, offers exposure to U.S. healthcare equipment and services, pharmaceuticals and biotechnology companies by tracking the Dow Jones U.S. Health Care Index. In terms of industrial exposure, pharma takes the top spot at 27.1%, followed by health care equipment (25%) and biotech (18.2%). The product has amassed nearly $2.3 billion in its asset base, while charging 43 bps in annual fees. It trades in a good volume of around 53,000 shares a day and has a Zacks ETF Rank #2 with a Medium risk outlook.
Eli Lilly and Company LLY: It is one of the world’s largest pharmaceutical companies that boasts a diversified product profile including a solid lineup of new successful drugs. The stock has a Zacks Rank #2 and an Earnings ESP of +2.21%. The Zacks Consensus Estimate for the to-be-reported quarter has been revised upward by 11 cents over the past month and represents year-over-year growth of 21.2%. The company’s trailing four-quarter positive earnings surprise is 12.46%, on average. The company is slated to release earnings results on Oct 27.
Stock market volatility and lower-rate environment are providing enough boost to the utilities sector. Being a low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is thus considered a defensive investment or a safe haven amid economic or political turmoil.
Utilities Select Sector SPDR XLU: With AUM of $11.3 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. Electric utilities takes the top spot in terms of sectors at 62.7%, closely followed by multi utilities (31.3%). The product charges 13 bps in annual fees and sees heavy volume of around 12.9 million shares on average. It has a Zacks ETF Rank #3 with a Medium risk outlook.
Ameren Corporation AEE: This utility company generates and distributes electricity and natural gas to residential, commercial, industrial and wholesale. The stock has a Zacks Rank #3 and an Earnings ESP of +1.47%. The stock has seen a positive earnings estimate revision of a penny for the to-be-reported quarter over the past month and has an expected earnings growth rate of 3.9%. Its trailing four-quarter earnings surprise is 2.38%, on average. The company is slated to release earnings results on Nov 13.
The technology sector has been showing strong resilience to the coronavirus pandemic. This is especially true, as the pandemic has led to the global digital shift, which has accelerated e-commerce for everything ranging from remote working to entertainment and shopping.
iShares U.S. Technology ETF IYW: This ETF offers exposure to 157 U.S. electronics, computer software and hardware, and informational technology companies. It tracks the Dow Jones U.S. Technology Capped Index. The fund has AUM of $6 billion and charges 43 bps in fees and expenses. Volume is good as it exchanges nearly 176,000 shares a day. The fund has a Zacks ETF Rank #1 with a Medium risk outlook (read: Trump or Biden: Whose Victory Will Benefit Tech ETFs?).
SSC Technologies Holdings Inc. SSNC: This company delivers investment and financial management software and related services focused exclusively on the financial services industry. It has a Zacks Rank #2 and an Earnings ESP of +0.86%. It has seen positive earnings estimate revision of a penny over the past 30 days for the to-be-reported quarter. The company’s trailing four-quarter earnings surprise is 9.95%, on average. It is slated to release earnings on Oct 29.
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Ameren Corporation (AEE): Free Stock Analysis Report
Eli Lilly and Company (LLY): Free Stock Analysis Report
SSC Technologies Holdings, Inc. (SSNC): Free Stock Analysis Report
Meritage Homes Corporation (MTH): Free Stock Analysis Report
Utilities Select Sector SPDR ETF (XLU): ETF Research Reports
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
iShares U.S. Healthcare ETF (IYH): ETF Research Reports
iShares U.S. Technology ETF (IYW): ETF Research Reports
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