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4 Sector ETF & Stock Picks to Bet on Ahead of Q4 Earnings

Sweta Killa

The fourth-quarter reporting cycle is around the corner with a few major banks set to report next week. Earnings for the S&P 500 Index are expected to grow 10.7% year over year on 5.2% higher revenues. This represents a notable deceleration from the average 25% earnings growth in the first three quarters of 2018.

In fact, the magnitude of earnings revision has moved down from 15.9% at the start of the quarter, representing higher estimate cuts than the preceding four quarters. The downtrend can be attributed to uncertain global economic backdrop that compounded with the market’s pre-existing worries about Fed policy and global trade (read: Dovish Fed Minutes Should Boost These ETFs).

However, seven of the 16 Zacks sectors are expected to post double-digit earnings growth with energy remaining the top contributor with 64.3% earnings growth. This is followed by earnings growth expectation of 26.6% for construction, 22.7% for transportation, 19.6% for finance and 19.2% for retail.

Given this, we have highlighted one ETF and one stock from some of these sectors that could make great plays as the 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

Energy Select Sector SPDR XLE: This is the largest and most-popular ETF in the energy space with AUM of $14.4 billion. Its expense ratio comes is 0.13%. The fund follows the Energy Select Sector Index and holds 30 securities in its basket. In terms of industrial exposure, oil, gas & consumable fuels accounts for nearly 89.6% of the portfolio, while energy equipment & services takes the remainder. The product has a Zacks ETF Rank #2 with a High risk outlook (read: A Pack of ETFs to Buy for 2019).

Black Stone Minerals L.P. BSM: This is one of the leading owners of oil and natural gas mineral primarily in the United States. The Zacks Consensus Estimate for the to-be reported quarter has been revised upward from 26 cents to 29 over the past 60 days. The company has an expected growth rate of 93.33%. It currently carries a Zacks Rank #2 and has an Earnings ESP of +8.14%. The company is scheduled to report earnings results on Feb 25.

Construction

iShares U.S. Home Construction ETF 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 48 stocks with double-digit concentration on the top two firms that account for 13.7% share each. The product has amassed $972.2 million in its asset base and charges 43 basis points (bps) in annual fees. It has a Zacks ETF Rank #3 with a High risk outlook.

Taylor Morrison Home Corporation TMHC: This homebuilder and land developer is engaged in building single-family detached and attached homes for first-time buyers, move-up families to luxury and active adult customers. It has a Zacks Rank #3 and an Earnings ESP of +48.07%. The stock saw earnings estimate revision of a penny over the past 60 days for the fourth quarter, representing a year over year decline of 39%. It delivered a positive earnings surprise of 15.22% in the past four quarters. The company is slated to release earnings results on Feb 6.

Transportation

iShares Dow Jones Transportation Average Fund IYT: This ETF follows the Dow Jones Transportation Average Index and offers exposure to the broad transportation sector. The fund holds a small basket of 20 stocks with railroads, air freight & logistics, airlines and trucking taking the top four spots. The fund has accumulated $603.3 million in its asset base and charges 43 bps in annual fees. It has a Zacks ETF Rank #3 with a High risk outlook (read: Stocks & ETFs to Pick From Goldman Sachs' Favored List in 2019).

Hub Group Inc. HUBG: This is a transportation management company that provides multi-modal solutions throughout North America, including intermodal, truck brokerage, dedicated and logistics services. It has a Zacks Rank #2 and an Earnings ESP of +3.05%. The Zacks Consensus Estimate for the to-be reported quarter is pegged at 90 cents, representing year- over-year decline of 69.9%. The stock has delivered average earnings surprise of 136.4% in the last four quarters. The company is slated to release earnings results on Feb 14.

Finance

Financial Select Sector SPDR Fund XLF: This fund follows the Financial Select Sector Index and holds 68 stocks in its basket with higher concentration on the top two firms. Banks dominate the fund’s portfolio with 43.3% while capital markets, insurance and diversified financial services round off the next three spots. The fund has accumulated nearly $23.8 billion in AUM and charges investors 13 bps in annual fees. It has a Zacks ETF Rank #1 with a Medium risk outlook (read: 10 Most-Heavily Traded ETFs of 2018).

The Progressive Corporation PGR: This company provides personal and commercial property-casualty insurance, and other specialty property-casualty insurance and related services primarily in the United States. It has a Zacks Rank #1 and an Earnings ESP of +0.89%. The stock saw positive earnings estimate revision of 4 cents for the to-be-reported quarter in a month and has an expected growth rate of 27.85%. For the last four quarter, the positive earnings surprise is 13.48%. The company is slated to release earnings results on Jan 23. You can see the complete list of today’s Zacks #1 Rank stocks here.

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