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Play Sector ETFs With Strong Beat Ratios

Sanghamitra Saha

Gone are the days when investors used to be happy with just earnings growth. Now, earnings improvement (no matter how big it is) seems inadequate for solid moves in the market. It is the beat that initiates a stock price rally post earnings.

There are plenty of reasons behind this phenomenon. After all, a 20% earnings rise (though apparently looks good) doesn’t tell you if earnings growth has been exhibiting a decelerating trend. Also, seasonal fluctuations come into play sometimes. If a company’s Q1 is seasonally weak and Q4 is strong, then it is likely to report a sequential earnings-decline in Q1. In such cases, growth rates are misleading while judging the true health of a company.

So, it makes sense to look at the beat ratios of the S&P 500 companies in the Q1 reporting season. As per the Earnings Trends issued on May 27, 2020, as much as 96.2% of the S&P 500 members have already reported results. Of these, 66.3% beat on earnings in Q1 of 2020 while 57.8% surpassed revenue estimates, translating into a blended beat ratio of 43.7%.

Against this backdrop, investors must be interested in finding out the sectors that have solid blended beat ratios so far this season. Below we highlight those so that investors can decide on for their future plays.

Medical – Health Care Select Sector SPDR ETF XLV

About 98.1% companies of the sector delivered a blended beat ratio of 67.3%. As many as 86.5% companies beat on earnings while 76.9% outperformed on revenues. In any case, the wind is in favor of medical sector investing right now (given the ongoing medical emergency of coronavirus), making XLV a winning proposition. The Zacks Rank #2 (Buy) XLV added 12.7% past month.

Construction – iShares U.S. Home Construction ETF ITB

All companies have reported already and produced a blended beat ratio of 50%. Of this, earnings beat ratio is 85.7% while revenue beat ratio is 50%. The home-building sector has suffered a lot amid the COVID-19 lockdown, but is likely to see meaningful sales recovery ahead on low mortgage rates and a likely decline in prices. The Zacks Rank #3 (Hold) fund ITB is up about 40% past month (read: Why Housing Market & ETFs Are Due for a V-Shaped Recovery).

Technology – Technology Select Sector SPDR Fund XLK

As many as 91.3% companies of the sector have reported already and registered a blended beat ratio of 58.7%. There were 77.8% companies beating on earnings and 65.1% companies surpassing revenue estimates. The sector has been a true winner amid COVID-19 thanks to the rising work-and-learn-from-home trend. The Zacks Rank #1 (Strong Buy) XLK is up about 16.8% past month (read: 5 Solid Tech ETFs Available Below $35).

Industrials – iShares U.S. Industrials ETF IYJ

All companies have reported already and produced a blended beat ratio of 44.8%. Of this, earnings beat ratio is 75.9% while revenue beat ratio is 51.7%.  U.S. manufacturing activity recovered from an 11-year low in May, in a sign that the worst of COVID-19 economic crisis is probably over. Some of the industries were considered part of the critical workforce amid lockdown. The Zacks Rank #2 IYJ has gained 13.3% past month(read: U.S. Manufacturing Points to a Recovery: 5 Winning ETF Areas).

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Technology Select Sector SPDR ETF (XLK): ETF Research Reports
 
Health Care Select Sector SPDR ETF (XLV): ETF Research Reports
 
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
 
iShares U.S. Industrials ETF (IYJ): ETF Research Reports
 
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Zacks Investment Research
 
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