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These $100B+ Stocks are Must-Buys Ahead of Q2 Earnings

Swarup Gupta
Travelers (TRV) misses Q2 earnings estimates but records year-over-year improvement largely attributed to lower level of catastrophe loss and higher net investment income.

On Jul 22, the most crucial week of this earnings season will begin. Several industry heavyweights are slated to report this period. This includes the likes of A&T T and more importantly, tech heavyweights like Amazon AMZN and Facebook FB. The nature of their results will determine the direction of stocks in the weeks to come.

The pace of earnings is likely to decelerate considerably this time around. In fact, this weakness is likely to be visible in the upcoming quarters. However, if key results outperform expectations, investors will catch a much-needed break. This is pertinent in view of the fact that a fresh estimate for second-quarter GDP is likely to show a considerable decline in the pace of growth.

Despite the pessimism, several sector bellwethers are projected to outperform their earnings estimates this week. Combined with a widely expected rate cut from the Federal Reserve, this should propel stocks substantially higher. This is why it makes sense to invest in these sector heavyweights ahead of second-quarter earnings results.

Pessimism About Second-Quarter Numbers Overstated

Even before earnings numbers started to flow in, market watchers were pessimistic about the chances of companies beating estimates for the reporting period ended June. As a consequence, the bar was set so low overall that companies are easily crossing the mark. Experts who had predicted an overall decline in profit are likely to left red in the face with the situation changing radically after the first batch of major reports.

As of last week, we had received second-quarter results from 79 S&P 500 members that combined account for 24.3% of the index’s total market capitalization. Total earnings for these 79 index members are up 2.6% from the same period last year on 2.9% higher revenues, with 79.7% beating EPS estimates and 60.8% beating revenue estimates. (Read: 3 Takeaways from Q2 Earnings Results Thus Far)

Numbers of this nature are reassuring, even at an early point in the earnings season. Optimistic tidings of this nature are likely to reduce volatility on the bourses. Meanwhile, managers are continuing to be conservative while issuing guidance for the remainder of the year.

Tech Bellwethers to Grab Center Stage

Of major companies expected to report earnings this week, some notable ones are Starbucks SBUX, Coca-Cola KO, Boeing BA, Caterpillar CAT and McDonald’s MCD. But tech heavyweights are likely to be in the spotlight.

Sector specialists are already worried about the upcoming batch of results, given the poor showing from Netflix NFLX, which is also part of the FAANG group of stocks. The streaming giant reported its first-ever decline in U.S. subscribers last week, leading to a 15% decline for the stock in the five sessions which followed.

Meanwhile, other FAANG group members are slated to report later this week. This includes Facebook, Amazon and Alphabet GOOGL.

For the second quarter, total earnings for the tech sector are expected to be decline 8.9% from the same period last year on 2.6% higher revenues. While this seems dismal at first glance, there have been notable exceptions like Microsoft MSFT which posted a stellar earnings performance last week. Sales rose 12%, fueled by its cloud business.   

Our Choices

Even at an early point in the earnings season, it is more than obvious that fears about the nature of second-quarter numbers were overstated. Possibly the bar was set so low that the majority of companies are surpassing expectations rather easily. This is why it makes sense to stock up on major firms slated to beat second-quarter expectations.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

You could further narrow down the list of choices by looking at stocks that have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Lockheed Martin LMT has been benefiting from solid order growth. F-35 continues to be a major revenue contributor. Of late, the company is witnessing increased demand for its THAAD missiles from the Kingdom of Saudi Arabia.

Lockheed Martin surpassed the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 17.4%.

Powered with the right combination of the two key ingredients — an Earnings ESP of +0.14% and a Zacks Rank of 1 — our proven model shows that an earnings beat is likely for Lockheed Martin in the to-be-reported quarter as well.

The company is expected to report second-quarter 2019 results on Jul 23.

Visa Inc. V is being backed by numerous strategic acquisitions and alliances, as well as technology upgrades and effective marketing. The acquisition of Visa Europe is likely to be another long-term growth driver for the company.

Visa beat the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 5.4%.

Given an Earnings ESP of +0.58% and a Zacks Rank of 2, our proven model shows that an earnings beat is likely for Visa in the to-be-reported quarter.

The company is expected to report third-quarter fiscal 2019 results on Jul 23.

Thermo Fisher TMO is demonstrating strength in all end markets categorized by customer type or geography. In the last-reported quarter, the company registered solid international performance with growth in Asia-Pacific including China.

Thermo Fisher beat the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 2.9%. This time, Thermo Fisher is powered by an Earnings ESP of +0.54% and a Zacks Rank of 2.

The company is expected to report second-quarter 2019 results on Jul 24.

PayPal Holdings, Inc. PYPL continues to be buoyed by its robust portfolio of offerings. PayPal’s improving monetization efforts and increasing adoption rate across various platforms are aiding total active accounts. Further, robust mobile checkout services of One Touch are contributing to the company’s total payment volume growth.

PayPal beat the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 7.6%. This time, PayPal’s Earnings ESP of +11.19% and Zacks Rank of 2 increases our predictive power of an earnings beat.

The company is expected to report second-quarter 2019 results on Jul 24.

Facebook is benefiting from solid mobile ad revenues, driven by impressive growth in Instagram Stories and Feed, and Facebook News Feed. Interactive Stories ads on Instagram are likely to lead to better interaction among people, businesses and advertisers.

Powered with the right combination of the two key ingredients — an Earnings ESP of +0.61% and a Zacks Rank of 2 — our proven model shows that an earnings beat is expected for Facebook in the to-be-reported quarter as well.

The company is expected to report second-quarter 2019 results on Jul 24.

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Netflix, Inc. (NFLX) : Free Stock Analysis Report
 
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
Facebook, Inc. (FB) : Free Stock Analysis Report
 
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
 
PayPal Holdings, Inc. (PYPL) : Free Stock Analysis Report
 
AT&T Inc. (T) : Free Stock Analysis Report
 
The Boeing Company (BA) : Free Stock Analysis Report
 
Lockheed Martin Corporation (LMT) : Free Stock Analysis Report
 
Coca-Cola Company (The) (KO) : Free Stock Analysis Report
 
Microsoft Corporation (MSFT) : Free Stock Analysis Report
 
Thermo Fisher Scientific Inc. (TMO) : Free Stock Analysis Report
 
Caterpillar Inc. (CAT) : Free Stock Analysis Report
 
Starbucks Corporation (SBUX) : Free Stock Analysis Report
 
McDonald's Corporation (MCD) : Free Stock Analysis Report
 
Visa Inc. (V) : Free Stock Analysis Report
 
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