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Bet on Top-Notch Sector ETFs & Stocks to Sparkle Q4

Sweta Killa

Wall Street saw the worst start to the fourth quarter in about a decade, driven by a barrage of downbeat economic reports that points to deeper domestic troubles. The third-quarter earnings picture also looks soft, thanks to tough comparisons, moderating economic growth and the persistent trade dispute (read: 4 Sector ETFs & Stocks to Bet on Ahead of Q3 Earnings).

The S&P 500’s earnings are expected to decline 5.1% year over year despite 4.2% higher revenues. This would follow 0.4% growth in the second quarter and a flat showing in the first quarter. Additionally, trade gyrations and Brexit issues remained an overhang on the stocks.

However, positive developments in the U.S.-China talks and hopes of a Brexit deal spread some optimism lately. This is especially true as the world’s two largest economies agreed to the first phase of a substantial trade deal wherein the United States suspended the tariff hike on $250 billion worth of Chinese goods slated to be effective this week and Beijing lent a consent to buy $40-$50 billion of U.S. farm products. Though the move has eased some concerns over a global slowdown, the uncertainty regarding the partial accord looms large as China wants further discussions before signing the so-called “Phase 1” trade deal (read: ETFs to Buy on Phase 1 of U.S.-China Trade Deal).

Further, the European Union and the United Kingdom have agreed to intensive Brexit negotiations in the coming days.

Against such a backdrop, investors could be well served by ETFs and stocks from sectors that house top-ranked industries.

How to Find the Top-Performing Sectors

While identifying the top-performing sector is a daunting task, the Zacks Industry Rank makes this process simpler. The Zacks Industry Rank is determined by calculating the average Zacks Rank for each stock in the industry and then assigning a rank to it. First, we selected the best industries that have a top Zacks Rank.

A top Zacks Industry Rank means that more stocks within that group are seeing upward earnings estimate revisions. Since an industry is a group of stocks in a similar business, this is the perfect way to size it up (read: all the Top Ranked ETFs).

The Zacks Industry classification divides the business world into 16 sectors comprising 60 medium or M-level industries and 265 or X-level industries. We rank all 265 X-level industries on the basis of earnings outlook of the constituent companies into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).

The top 132 Zacks Ranked industries feature in the top 50% of all X-level industries whereas the bottom 133 Zacks Ranked industries are in the bottom 50%.

Aerospace

The aerospace sector is expected to outperform with all the three industries under it having a top-ranked Zacks industry.

iShares U.S. Aerospace & Defense ETF ITA: This fund provides investors with exposure to the broad aerospace and defense industry by tracking the Dow Jones U.S. Select Aerospace & Defense Index. Holding 34 stocks, the fund is highly concentrated on the top two firms at 22.3% and 16%, respectively, while other firms hold not more than 6.9% share each. The fund has AUM of nearly $5.5 billion and charges 42 bps in fees a year. Volume is good at around 151,000 shares. The ETF has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: ETFs to Gain/Lose on Trump's Impeachment Talks).

Leidos Holdings Inc. LDOS: This Zacks Rank #1 (Strong Buy) company provides services and solutions to the defense, intelligence, civil and health markets in the United States and internationally. The stock saw a positive earnings estimate revision of a couple of cents for this year in the past 30 days and is expected to see earnings growth of 8.22%. The stock has a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Construction

The U.S. construction market has been buoyant on lower mortgage rates and decelerating home price growth, which have encouraged people to buy more homes. About 70% of the industries from this sector are top-ranked with homebuilders (top 5%), and paints & related products (top 5%) leading the way followed by heavy construction (top 13%), miscellaneous (top 22%), and concrete and aggregates (top 31%).

iShares U.S. Home Construction ETF ITB: This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $1.3 billion, it holds a basket of 45 stocks with heavy concentration on the top four firms. The product charges 42 bps in annual fees and trades in a hefty volume of around 2.1 million shares per day on average. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Why Homebuilder ETFs Are Rising).

MasTec Inc. MTZ: This Zacks Rank #1 infrastructure construction company provides engineering, building, installation, maintenance and upgrade services for communications, energy, utility and other infrastructure, primarily in the United States and Canada. It saw no earnings estimate revision for this year in the past month and has an estimated growth rate of 34.2%. The stock has a VGM Score of A.

Medical

Almost all the industries under this sector are top-ranked with nursing homes (top 3%) leading the way followed by drugs (top 21%), services (top 22%), instruments (top 25%) and medical info system (top 26%). The dual tailwinds of encouraging industry fundamentals including M&A and the sector’s defensive tilt made the sector attractive.

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 61 securities in its basket with double-digit concentration on the top firm while others hold not more than 6.4% of the assets. Pharma accounts for 31.9% share from a sector look while healthcare equipment and supplies, healthcare providers and services, and biotech have double-digit exposure each. The product manages nearly $16.9 billion in its asset base and trades in a heavy volume of around 11 million shares. Expense ratio comes in at 0.13%. XLV has a Zacks ETF Rank of 2 with a Medium risk outlook (read: ETF Market Outlook for Q4 2019).

Neurocrine Biosciences Inc. NBIX: This Zacks Rank #2 neuroscience-based company is focused on the discovery and development of novel therapeutics for neuropsychiatric, neuroinflammatory and neurodegenerative diseases and disorders. It saw no earnings estimate revisions for this year in the past 30 days and has an expected growth rate of 272.73%. The stock has a VGM Score of B.

Utilities

More than 85% of the industries from the sector belongs to a top Zacks Industry Rank. National wireline and rural wireline are the top industries followed by electric power (top 27%), gas distribution (top 33%) and water supply (top 37%). Volatility and Fed rate cuts are providing enough boost to the utilities sector.  

Utilities Select Sector SPDR XLU: With AUM of $11.3 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. It is primarily concentrated on the top firm with 12.8% share while other firms hold not more than 8% of the assets. Electric utilities take the top spot in terms of sectors at 61.1%, closely followed by multi utilities (32.5%). The product charges 13 bps in annual fees and sees a massive volume of around 17.3 million shares on average. It has a Zacks ETF Rank #3 with a Medium risk outlook (read: Chances of Fed Rate Cut in October Rise: Sector ETFs to Buy).

NRG Energy Inc. NRG: This Zacks Rank #1 company is engaged in the production, sale and delivery of energy and energy products and services to residential, industrial as well as commercial consumers across major competitive power markets in the United States. It witnessed no earnings estimate revision for this year in a month and has projected an earnings growth rate of 61.41%. The stock has a VGM Score of A.

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