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Forget Earnings Recession: Tap Revenue Growth With These ETFs

Sanghamitra Saha
Shares of Square (SQ) have climbed over 30% in 2019 to outpace the S&P 500's 17% climb and nearly match fellow fintech power PayPal's (PYPL) jump. With that said, let's see if investors should think about buying Square heading into its first-quarter fiscal 2019 earnings release that is due out after the closing bell on Wednesday, May 1.

The first-quarter (Q1) earnings growth is likely to be negative this year, marking the first earnings decline since 2016 Q2. However, the revenue growth picture is assuring. But margins have taken a hit from waning benefits from $1.5 trillion in tax cuts, the rise in payroll, materials and transportation expenses.  

The bottom line may be investors’ top focus going into an earnings season, but top line probably tells you more about the inherent strength of a company.

Why to Follow Revenue Growth This Reporting Cycle?

For Q1, total earnings are expected to decline 4% from the same period last year on 4.6% higher revenues as per the Earnings Trends issued on Apr 3, 2019. Earnings growth will likely slacken from Q4's 14.4% rate while revenue growth will slow down slightly (last quarter’s was 6.7%).

For Q1, 10 out of the Zacks classified 16 sectors of the S&P 500 will likely witness negative growth in earnings while five sectors are expected to see revenue recession.

Further, investors should note that sales are harder to be influenced in an income statement than earnings. A company can land up on decent earnings numbers by adopting cost-cutting or some other measures that do not speak for its core strength. But it is harder for a company to mold its revenue figure.

Below we highlight a few sectors and their related ETFs that could be used to book some profits on revenue growth potential.

Retail – VanEck Vectors Retail ETF RTH

Revenues of the sector are expected to expand 7.3% in Q1 followed by 5.6% expansion in Q4. It is also expected to see an uptick (up 2.9%) in earnings. Though waning benefits from $1.5 trillion in tax cuts and inclement weather in February weighed on retail sales in February, the momentum is pretty strong given the decent U.S. economic growth (read: Is February Retail Sales Spooking You? Play These 4 ETF Areas).

Consumer Discretionary – Invesco DWA Consumer Cyclicals Momentum ETF PEZ

Revenues are expected to expand 9.8% in Q1 followed by 12.3% expansion in Q4. An upbeat job market, a dovish Fed, a steady manufacturing sector and investors home-buying spree corroborates a steady economy and thus a smooth ride for discretionary ETFs.

Aerospace – Invesco Aerospace & Defense ETF PPA

The sector is expected to record 8.6% revenue growth in Q1, following 9.3% expansion in the previous quarter. After all, President Trump’s intension to offer a boost to the proposed defense budget for fiscal 2020 favors this segment.

Trump has proposed a 5% or $34 million increase in defense spending to a total of $750 billion, beating Pentagon officials’ expectation of a budget of $733 billion, which would mark a 2.4% increase over last year’s. This makes PPA an intriguing pick (read: After a Lull, Will Defense-Related ETFs Surge Ahead?).

Finance – Invesco DWA Financial Momentum ETF PFI

Though certain parts of the yield curve inverted in March and weighed on financial ETFs, the segment should remain steady this year on a dovish Fed and decent economic growth momentum. This should result in steepening of the yield curve. The sector is expected to witness revenue growth of 6.5% in Q1, after 10% growth in Q4.

Medical – ARK Genomic Revolution Multi-Sector ETF ARKG

The space is thriving with mergers and acquisitions in the biotech space. Plus, incessant drug approvals and rising demand from emerging markets are pushing the sector higher. The sector is expected to report 5.9% revenue growth on top of 7.9% recorded in Q4 (read: Biotechnology Market on a Tear: 5 ETFs in Spotlight).

Energy – Invesco S&P SmallCap Energy ETF PSCE

Oil prices made a comeback recently, buoyed by the fresh output cut decision by OPEC and Russia for the first six month of 2019, U.S. sanctions against Venezuela on political ground and U.S.-Sino trade deal hopes. The sector is expected to report 4.8% revenue growth on top of 12.9% recorded in Q4. This makes PSCE a good pick (read: Small-Caps Beat S&P 500 in Q1: 5 ETF Winners).

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Invesco Aerospace & Defense ETF (PPA): ETF Research Reports
 
Invesco S&P SmallCap Energy ETF (PSCE): ETF Research Reports
 
VanEck Vectors Retail ETF (RTH): ETF Research Reports
 
Invesco DWA Consumer Cyclicals Momentum ETF (PEZ): ETF Research Reports
 
Invesco DWA Financial Momentum ETF (PFI): ETF Research Reports
 
ARK Genomic Revolution Multi-Sector ETF (ARKG): ETF Research Reports
 
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