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Earnings & Trade Effect: Mid-Cap Stocks Set To Shine

Sweta Killa
Let's see if Gray Television, Inc. (GTN) stock is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks.

As Q2 earnings season is in full gear, investors are highly optimistic about the benefits of the historic tax cut. A slew of positive economic data, indicating a healthier economy with a solid job market and desired inflation rates, are also pushing up the confidence level.

In particular, earnings for about 17% of the S&P 500 members that have reported Q2 earnings so far are up 20.9% from the same period last year on 10.3% higher revenues, with 86.2% of the companies beating EPS estimates and 77% surpassing revenue estimates. Investors should note that the proportion of positives surprises is tracking materially above historical periods. Overall, total earnings are expected to be up 21% on 8.3% higher revenues, with double-digit earnings growth for 11 of the 16 Zacks sectors.

However, the threat of full-blown trade war is looming large with Trump’s intention to slap import tariffs on all $505 billion of Chinese goods. Both the United States and China levied taxes on $34 billion of each other goods, effective Jul 6. The Federal Reserve’s Beige Book survey of businesses shows that the companies have started to feel the pressure of higher costs of raw materials thanks to tariffs on steel and lumber. As a result, the trade disputes could undermine economic growth, triggering a global recession.

Additionally, Trump in a tweet ramped up its antitrade policies on American trading partners, citing that the European Union and China are manipulating their currencies, and putting the United States at a disadvantage. He also criticized the Fed’s rate increase policy saying that higher interest rates are reducing the effect of massive tax cuts intended to boost U.S. economic expansion in its ninth year and are making the United States less competitive.

Further, Trump warned Iran that any threats to the United States would be met with unspecified dire consequences. His tweet says “NEVER, EVER THREATEN THE UNITED STATES AGAIN OR YOU WILL SUFFER CONSEQUENCES THE LIKES OF WHICH FEW THROUGHOUT HISTORY HAVE EVER SUFFERED BEFORE. WE ARE NO LONGER A COUNTRY THAT WILL STAND FOR YOUR DEMENTED WORDS OF VIOLENCE & DEATH. BE CAUTIOUS!” This marks the latest step amid escalating geopolitical tension.

In such a scenario, investors seeking to participate in a growing American economy and earnings, but worried about Trump’s trade policies should consider mid-cap stocks. This is especially true as these middle-of-road securities are arguably safer and have the potential to move higher in turbulent times, especially if political issues or financial instability creep into the picture.

How to Pick Winning Stocks?

We have used the Zacks stock screener to find six stocks that are poised to profit from a combination of strong earnings and trade worries. First, we screened through various metrics such as stock Rank #1 (Strong Buy) or 2 (Buy), VGM Score of A or B, market capitalization between $2-$10 billion, top Zacks industry Rank in the top 10%, and double-digit estimated earnings growth for this year.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Then we have added a flavor of Q2 earnings with a positive Zacks Earnings ESP. According to the our methodology, a Zacks Rank #1 or 2 when combined with a positive Earnings ESP increases our chances of predicting an earnings beat. Our research shows that for stocks with this combination, the chance of positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Finally, we arrived at five mid-cap picks that could be compelling choices amid trade woes and earnings growth situation:

Louisiana-Pacific Corporation LPX

It manufactures building materials and engineered wood products in the United States, Canada, Chile and Brazil.

Zacks Rank: #1
VGM Score: B
Market Cap: $3.88 billion
Industry Rank: Top 4%
This Year Estimated Earnings Growth: 30.47%
Earnings ESP: +8.62%

Landstar System Inc. LSTR

This is an asset-light provider of integrated transportation management solutions worldwide.

Zacks Rank: #2
VGM Score: A
Market Cap: $4.67 billion
Industry Rank: Top 5%
This Year Estimated Earnings Growth: 55.47%
Earnings ESP: +0.41%

Vishay Intertechnology Inc. VSH

This is one of the world's largest manufacturers of discrete semiconductors (diodes, MOSFETs, and infrared optoelectronics) and passive electronic components (resistors, inductors, and capacitors).

Zacks Rank: #1
VGM Score: A
Market Cap: $3.64 billion
Industry Rank: Top 5%
This Year Estimated Earnings Growth: 30.07%
Earnings ESP: +2.41%

Arrow Electronics Inc. ARW

This is the world's largest distributor of electronic components and computer products to industrial and commercial customers.

Zacks Rank: #2
VGM Score: A
Market Cap: $6.73 billion
Industry Rank: Top 7%
This Year Estimated Earnings Growth: 16.24%
Earnings ESP: +0.93%

Newfield Exploration Company NFX

This company explores, develops and acquires oil and natural gas properties primarily in the Gulf of Mexico.

Zacks Rank: #2
VGM Score: A
Market Cap: $5.72 billion
Industry Rank: Top 9%
This Year Estimated Earnings Growth: 54.88%
Earnings ESP: +4.42%

Domtar Corporation UFS

This is a leading provider of a wide variety of fiber-based products including communication, specialty and packaging papers, market pulp and absorbent hygiene products.

Zacks Rank: #1
VGM Score: A
Market Cap: $3.01 billion
Industry Rank: Top 9%
This Year Estimated Earnings Growth: 43.08%
Earnings ESP: +1.70%

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