Second-quarter earnings season is winding down, and it’s a mixed bag for the broader market. Companies continue to struggle to grow revenues. Revenue growth year over year is negative as the economy struggles to gain traction. Cost-cutting measures and stock buybacks have helped provide some earnings growth in the quarter, but eventually we have to see companies sell more of their products and services.
Let’s look at a few sectors and see what we learned this quarter — and use Portfolio Grader to help us identify possible portfolio pickups.
Financial services companies have provided the best earnings growth in the quarter. Banks and other finance companies are seeing the positive impact of improving real estate markets and an improvement in credit quality. They also no longer have to take charges and add to loss provisions, as they had in the past few years. Investors can focus on “A”-rated stocks like Intervest Bancshares (IBCA), Virginia Commerce Bank (VCBI) and 1st Century Bancshares (FCTY) to capture the gains from continued improvements in bank stocks.
Consumer discretionary companies also turned in a strong quarter, with solid earnings growth above analyst expectations. There are some signs in recent weeks that consumers are pulling back and becoming less confident, so you have to be selective with these stocks. Investors should stick with stocks like Whirlpool (WHR), Netflix (NFLX) and Conn’s (CONN) to gain exposure to consumer companies that are seeing strong revenue and profit growth.
The worst performance has come from the resources and metals sector. Most of these companies have reported very poor earnings and revenue growth and should be avoided at this time. Excess supplies of iron ore, steel and copper, coupled with a lack of demand, should keep a lid on any turnaround in this sector for at least the rest of the year. If you must play the group, stick to “A”-rated stocks like Sutor Technology (SUTR) and Sealed Air (SEE).
Looking ahead to the third quarter, 68 companies of the S&P 500 have issued negative EPS guidance vs. just 17 companies raising EPS guidance. Companies on average have been reporting earnings that are just 2.5% above the analyst estimates — the lowest upside percentage since 2008 according to Factset. These factors are probably going to cause most market observers to lower their estimates for the rest of the year — and such a move could bring selling pressure into stocks with poor fundamentals.
It is more important than ever to use tools like Portfolio Grader and stay in the very best stocks as the stock market advance continues to narrow and investors become much more selective.