First-quarter corporate profits will certainly show contraction as the economy is hammered by the coronavirus outbreak and the subsequent shutdowns. The quarter will most likely be a complete washout for many companies, particularly retailers and restaurants.
The pandemic has also brought Airline, Hospitality and Auto industries to a grinding halt. These segments have been hurt by the massive drop in discretionary spending.
Overall, business activities in the United States contracted in March, slipping to a record low as the outbreak dampened activity in the manufacturing and service sectors. The virus, in particular, has crippled the manufacturing sector primarily due to the stay-at-home directives in several parts of the country. Coronavirus-induced supply chain disruptions and social distancing measures impacted factory activities.
By the way, earnings estimates for the first quarter have started to move down as the pandemic has halted economic growth and led market pundits to forecast a recession this year. Several oil bigwigs including Exxon Mobil and Chevron have slashed estimates. After all, the pandemic has hit oil demand and led to oversupply issues.
Automakers General Motors and Ford, and aerospace giant Boeing too trimmed estimates. In fact, Bank of America sees first-quarter earnings decline of 13% year over year. It also expects year-on-year earnings decline in all four quarters of this year, marking the first recession since 2015-16.
Broader bank earnings are going to take a hit as well. A low interest rate environment does cut into net interest income for banks. At the same time, rising unemployment is expected to result in increased loan losses, something that will weigh on banks’ earnings. Companies had to lay off workers in the wake of the rapid spread of COVID-19 and its impact on businesses (read more: 4 Winning Bank Stocks for Coronavirus-Marred Q1 Earnings).
For the first quarter as a whole, total earnings for S&P 500 companies are expected to drop 9% from the same period last year. Revenues, in the meanwhile, are likely to rise only 1.6% (read more: What to Expect from Big Bank Earnings Amid the Coronavirus?).
On the brighter side, there are certain sectors which might see earnings growth. Such sectors with positive earnings growth in the first quarter includes Construction (+4.2%), Medical (+0.9%), Consumer Staples (+0.6%) and Utilities (+1.9%). The virus scare has fueled demand for U.S. debt, which in turn pushed Treasury yields to new lows. Mortgage rates are most likely to go down as they generally follow the direction of the yield on the 10-year Treasury note in the United States. And lower mortgage rates will certainly boost homebuying.
Medical stocks have also defied the turbulent times. And it’s mostly because these companies are trying to develop a treatment for coronavirus, which helped garner impressive gains over the last couple of weeks. And should these clinical tests prove successful, such stocks will scale north.
And as the market is plagued with uncertainty, defensive stocks have performed relatively better. This is because such stocks are generally non-cyclical, or companies whose business performance and sales are not highly correlated with activities in the larger market. Their products are in constant demand irrespective of market volatility and such companies include names from the utilities and consumer staples sectors.
Utilities are deemed defensive stocks as electricity, gas and water are essentials. Food, beverage and tobacco companies are true defensive plays as demand for such staple stocks remains unaffected by economic downturns.
5 Stocks to Gain Heading Into Q1 Earnings
It will be prudent to consider solid companies from the aforesaid winning sectors, which are expected to report an uptick in first-quarter earnings. These stocks have a positive Earnings ESP. This is our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
Meritage Homes Corporation MTH is one of the leading designers and builders of single-family homes. The stock has a Zacks Rank #3 (Hold). The company is expected to report earnings results for the quarter ending March on Apr 28. Meritage Homes has an Earnings ESP of +4.70%. The company’s expected earnings growth rate for the current quarter and year is 25.2% and 6.4%, respectively.
Sarepta Therapeutics, Inc. SRPT is a commercial-stage biopharmaceutical company. The stock has a Zacks Rank #3. The company is expected to report earnings results for the quarter ending March on May 13. Sarepta Therapeutics has an Earnings ESP of +20.20%. The company’s expected earnings growth rate for the current quarter is 48.1%.
The Clorox Company CLX manufactures and markets consumer and professional products. The stock has a Zacks Rank #1 (Strong Buy). The company is expected to report earnings results for the quarter ending March on May 1. Clorox has an Earnings ESP of +1.81%. The company’s expected earnings growth rate for the current and next year is 1.7% and 5.4%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Hain Celestial Group, Inc. HAIN manufactures, markets, distributes, and sells organic and natural products. The stock has a Zacks Rank #1. The company is expected to report earnings results for the quarter ending March on May 14. Hain Celestial has an Earnings ESP of +9.24%. The company’s expected earnings growth rate for the current quarter and year is 14.3% and 10.6%, respectively.
Entergy Corporation ETR engages in the production and distribution of electricity in the United States. The stock has a Zacks Rank #3. The company is expected to report earnings results for the quarter ending March on May 6. Entergy has an Earnings ESP of +5.69%. The company’s expected earnings growth rate for the current and next year is 2.8% and 7.9%, respectively.
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