The Q3 earnings season is underway with major banks set to report this week. Earnings for the S&P 500 index are expected to grow 2.3% from the same period last year on 5% higher revenues, as per the latest Earnings Trends.
However, earnings growth is on track to be the lowest this year after double-digit growth in each of the first two quarters and with high single-digit expected earnings growth in the last quarter. This is especially true as twin attacks by hurricanes Harvey and Irma have taken toll on many industries such as insurance, energy, airlines and autos. Per Moody’s Analytics, the two storms may lead to $150-$200 billion in damages.
While earnings estimates for Q3 have declined from 6.3% at the start of the period, the magnitude of negative revision is lower than the recent quarters. Of the 16 Zacks sectors, seven are likely to be contributors to earnings growth, with energy leading the way.
Like the last reporting cycle, the energy sector has the strongest growth projection of 122.3% for Q3, primarily reflecting easier comparisons. This is followed by earnings growth of 16.1% for conglomerates, 9.7% for technology, 8.7% for industrial products, and 8.3% for construction.
Given this, we have highlighted one ETF and one stock from some of these sectors that could make great plays as the Q3 earnings season unfolds. Each of these ETFs and stocks have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). For stocks, we have added the extra flavor of a positive Earnings ESP. This is because stocks with this combination have a 70% chance of beating estimates when their earnings are released, and a VGM Style Score of B or better.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Energy Stocks and ETFs With the Best Potential for Q3 Earnings: VanEck Vectors Oil Services ETF (OIH)
VanEck Vectors Oil Services ETF (NYSEARCA:OIH): This fund tracks the MVIS U.S. Listed Oil Services 25 Index, which offers exposure to companies involved in oil services to the upstream oil sector, which include oil equipment, oil services or oil drilling. Holding 26 stocks in its basket, the product is largely concentrated on the top two firms, Schlumberger Limited (NYSE:SLB) and Halliburton Company (NYSE:HAL), that collectively make up for 32.8% share in the basket.
Other firms hold no more than 6.1% of total assets. With AUM of $1.2 billion and average daily volume of about 6.1 million shares, this is by far the largest and the most popular ETF in the energy space. The ETF charges 35 bps in annual fees and has a Zacks ETF Rank #3 with a High risk outlook.
Energy Stocks and ETFs With the Best Potential for Q3 Earnings: Andeavor (ANDV)
Andeavor (NYSE:ANDV): The company is engaged in the refining and marketing of petroleum products. It has seen solid earnings estimate revision of 76 cents for the yet-to-be reported quarter over the past 90 days and has an expected growth rate of 88.03%.
It has a Zacks Rank #2 and an Earnings ESP of +10.23%. The stock delivered a positive earnings surprise in each of the last four quarters, with an average beat of 40.70%. It belongs to a strong Zacks Industry Rank in the top 16% and is scheduled to report its earnings results on Oct 30.
Technology Stocks and ETFs With the Best Potential for Q3 Earnings: iShares Dow Jones US Technology ETF (IYW)
iShares Dow Jones US Technology ETF (NYSEARCA:IYW): This ETF tracks the Dow Jones US Technology Index, giving investors exposure to 141 technology stocks. It has concentration on the top two firms, Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT), with a combined 29.1% share while others hold no more than 8.5% of assets.
More than half of the portfolio is allocated to software and services while technology hardware and equipment as well as semiconductors round off the next two spots. The fund has amassed $3.6 billion in its asset base while charging 44 bps in fees and expenses. Volume is good as it exchanges nearly 191,000 shares in hand a day. The fund has a Zacks ETF Rank #1.
Technology Stocks and ETFs With the Best Potential for Q3 Earnings: Applied Materials Inc. (AMAT)
Applied Materials, Inc. (NASDAQ:AMAT): This company develops, manufactures, markets and services semiconductor wafer fabrication equipment and related spare parts for the worldwide semiconductor industry. It has a Zacks Rank #1 and an Earnings ESP of +0.32%. The stock saw positive earnings estimate revision of a dime over the past three months for the to-be-reported quarter with an expected earnings growth rate of 36.93%.
It also delivered average earnings surprise of 2.66% for the last four quarters. The stock has seen no earnings estimate revisions over the past three months for the second. The company has a solid Zacks Industry Rank in the top 11% and is slated to release earnings results on November 16.
Industrial Stocks and ETFs With the Best Potential for Q3 Earnings: Industrial Select Sector SPDR (XLI)
Industrial Select Sector SPDR (NYSEARCA:XLI): This is the most popular ETF in the industrial space with AUM of $12.5 billion and an average daily volume of more than 9 million shares. The fund follows the Industrial Select Sector Index, holding 68 stocks in its basket with each accounting for no more than 6.4% of the assets.
About one-fourth of the assets is allocated to aerospace & defense while industrial conglomerates, and machinery make up for a double-digit share each. This ETF charges 14 bps in fees per year and has a Zacks ETF Rank #2.
Industrial Stocks and ETFs With the Best Potential for Q3 Earnings: Parker-Hannifin Corp (PH)
Parker-Hannifin Corp (NYSE:PH): This company is a leading worldwide full-line manufacturer of motion control products, including fluid power systems, electro-mechanical controls and related components. It has a Zacks Rank #2 and an Earnings ESP of +0.36%.
The stock saw positive earnings estimate revision of four cents for the yet-to-be-reported quarter in the past three months with an expected growth rate of 24.50% and delivered positive earnings surprise of 14.47% for the last four quarters. The company is slated to release its earnings results on Nov 2, and belongs a solid Zacks Industry Rank in the top 26%.
Construction Stocks and ETFs With the Best Potential for Q3 Earnings: iShares U.S. Home Construction ETF (ITB)
iShares U.S. Home Construction ETF (BATS:ITB): This fund provides a pure play to home construction stocks by tracking the Dow Jones U.S. Select Home Construction Index. It holds a basket of 47 stocks with heavy concentration on the top two firms, D. R. Horton Inc (NYSE:DHI) and Lennar Corporation (NYSE:LEN), with a combined 22.9% share while other firms hold less than 9.2% of assets.
The product has amassed $1.9 billion in its asset base and trades in robust volume of around 2.8 million shares a day on average. It charges 44 bps in annual fees and has a Zacks ETF Rank #2.
Construction Stocks and ETFs With the Best Potential for Q3 Earnings: Louisiana-Pacific Corporation (LPX)
Louisiana-Pacific Corporation (NYSE:LPX): This company manufactures building materials and engineered wood products in the United States, Canada, Chile and Brazil. It a Zacks Rank #3 and an Earnings ESP of +3.49%.
The stock saw solid earnings estimate revision of 18 cents over the past 90 days for the third quarter, representing whopping growth of 138.54%, and delivered a positive earnings surprise of 7.14% last quarter. The company is slated to release its earnings results on Oct 30 and belongs to a strong Zacks Industry Rank in the top 44%.
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