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Beat Q1 Earnings Woes With These Sector ETFs & Stocks

Sweta Killa

The Q1 earnings season will officially kick off this week with a few major banks set to report quarterly results. Unlike the recent quarters, the earnings picture looks bleak with projected growth turning negative for the first time since the second quarter of 2016. S&P 500 earnings are expected to decline 4% from the same period last year despite 4.6% higher revenues while  net margins are likely to witness 100 basis points compression, per Earnings Trends report.

Earnings growth is expected to be negative for 10 of the 16 Zacks sectors, with technology and energy being the biggest drags. However, some earnings surprises are expected given the recent moderation in dollar, rise in oil prices, higher commodity prices, and fresh signs of stepped-up manufacturing activities that will act as tailwinds (read: U.S. Manufacturing Sector Grows in March: ETF & Stock Picks) .  

As a result, investors could place their bet on sectors that are expected to post positive earnings growth. Aerospace is expected to post strong earnings growth of 4.5%, followed by business services (3.4%), retail (2.9%), medical (2.7%), utilities (2.6%) and financials (0.5%).

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 criteria of a VGM Style Score of B or better and a positive Earnings ESP. Stocks with a Zacks Rank #3 or better and a positive ESP have a 70% chance of beating estimates.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Aerospace

iShares U.S. Aerospace & Defense ETF ITA: This fund provides investors exposure to 34 U.S. companies that manufacture commercial and military aircrafts and other defense equipment by tracking the Dow Jones U.S. Select Aerospace & Defense Index. The fund has AUM of nearly $5.1 billion and charges 43 bps in fees a year. Volume is good at around 342,000 shares. The ETF has a Zacks ETF Rank #2 with a Medium risk outlook (read: After a Lull, Will Defense-Related ETFs Surge Ahead?).

Lockheed Martin Corporation LMT: This is a global security and aerospace company principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. The stock has a Zacks Rank #3 and an Earnings ESP of +4.16%. Though the Zacks Consensus Estimate for the to-be reported quarter has been revised downward by 7 cents over the past 90 days, it represents a modest 6.72% earnings growth. Additionally, the company has delivered positive earnings surprise of 12.45% over the past four quarters and is scheduled to report earnings on Apr 23.

Retail

SPDR S&P Retail ETF XRT: This product follows the S&P Retail Select Industry Index, holding 94 securities in its basket. It has amassed $232.1 million in its asset base and charges 35 bps in annual fees. Volume is extremely solid, with nearly 6.7 million shares exchanged a day on average. The fund has a Zacks ETF Rank #3 with a Medium risk outlook (read: Is February Retail Sales Spooking You? Play These 4 ETF Areas).

Kohl's Corporation KSS: It operates as an omni-channel retailer in the United States. Its stores and website offer apparel, footwear, accessories, beauty, and home products. The stock has a Zacks Rank #1 and an Earnings ESP of +3.29%. Though it saw negative earnings estimate revision of 4 cents over the past 90 days for the to-be reported quarter, projected year-over-year growth rate is 7.81%. The company delivered a positive earnings surprise of 10.65% in the past four quarters. The company is slated to release earnings on May 28. You can see the complete list of today’s Zacks #1 Rank stocks here.

Medical

Health Care Select Sector SPDR Fund XLV: The most popular healthcare ETF, XLV follows the Health Care Select Sector Index. In total, the fund holds 62 securities in its basket, with the pharma sector taking the largest share at 32.5%. Healthcare equipment and supplies, healthcare providers and services, and biotech also have double-digit exposure each. The product manages nearly $19.1 billion in its asset base and trades in heavy volume of around 12 million shares. Expense ratio comes in at 0.13%. XLV has a Zacks ETF Rank #1 with a Medium risk outlook.

Infinity Pharmaceuticals Inc. INFI: This is an innovative cancer drug discovery and development company seeking to leverage its strength in small molecule drug technologies to discover, develop, and deliver to patients best-in-class medicines for the treatment of cancer and related conditions. It has a Zacks Rank #2 and an Earnings ESP of +39.79%. The Zacks Consensus Estimate for the to-be reported quarter has been revised upward from a loss of 17 cents to a loss of 8 cents over the past three months. Expected earnings growth rate is 55.56%. The stock has delivered average earnings surprise of 80.49% in the last four quarters. The company is slated to release earnings results on May 14.

Utilities

Utilities Select Sector SPDR XLU: With AUM of $9.5 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. Electric utilities take the top spot in terms of sectors at 60%, closely followed by multi utilities (33.1%). The product charges 13 bps in annual fees and sees heavy volume of around 19.8 million shares on average. It has a Zacks ETF Rank #3 with a Medium risk outlook (read: Selloff or Not, Utilities ETFs Should Stand Tall).

ONEOK Inc. OKE: This is a diversified energy company involved in oil and gas production, natural gas processing, gathering, storage and transmission in the mid-continent region of the United States. It has a Zacks Rank #3 and an Earnings ESP of +1.02%. The stock saw positive earnings estimate revision of 3 cents for the to-be-reported quarter in three months and has an expected growth rate of 14.06%. For the last four quarters, the average positive earnings surprise is 1.24%. The company is slated to release earnings results on May 7.

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