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Sector ETFs & Stocks to Bet for Q3 Earnings

Sweta Killa
The Zacks Analyst Blog Highlights: General Electric, Baker Hughes, Macquarie and Crane

After a tumultuous week, investors’ have turned their attention to earnings. The Q3 earnings season has kicked off, with a few major banks having reported last week. Earnings for the S&P 500 index are expected to grow 18.7% from the same period last year on 7.8% higher revenues. This would follow 25.5% earnings growth in Q2 on 9.8% revenue growth, the highest growth pace since 2010.

Though the magnitude of earnings revision has moved down from 19.6% at the end of June, the earnings growth pace has now started to pick up as companies come up with better-than-expected results. In fact, 10 of the 16 Zacks sectors are expected to post double-digit earnings growth with energy remaining the top contributor with 92% earnings growth. This was followed by earnings growth of 39.5% for construction, 34.9% for basic materials, 29.3% for finance and 20.9% for transportation (read: 5 Defensive ETFs to Survive Global Market Rout).

Given this, we have highlighted one ETF and one stock from some of these sectors that could make great plays as the Q3 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 flavor of a positive Earnings ESP. This is because stocks with this combination have a 70% chance of beating estimates when their earnings are released, and a VGM Style Score of B or better.

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

Energy

Energy Select Sector SPDR XLE: This is the largest and most-popular ETF in the energy space with AUM of $17.8 billion. Expense ratio comes in at 0.13%. The fund follows the Energy Select Sector Index and holds 30 securities in its basket. In terms of industrial exposure, oil, gas & consumable fuels accounts for nearly 89% of the portfolio, while energy equipment & services takes the remainder. The product has a Zacks ETF Rank #3 with a High risk outlook (read: 3 Country ETFs That Are Beneficiary of Higher Oil Prices).

Northern Oil and Gas Inc. NOG: This is an independent energy company engaged in the acquisition, exploration, exploitation, development, and production of crude oil and natural gas properties in the United States. The Zacks Consensus Estimate for the yet-to-be reported quarter has been revised upward from 7 cents to 12 over the past 90 days and has an expected growth rate of 200%. It has a Zacks Rank #2 and an Earnings ESP of +13.89%. The stock delivered a positive earnings surprise of 138.54% for the last four quarters. It is scheduled to report earnings results on Nov 14.

Construction

iShares U.S. Home Construction ETF ITB: This fund provides a pure play to home construction stocks by tracking the Dow Jones U.S. Select Home Construction Index. It holds a basket of 47 stocks with double-digit concentration on the top two firms that account for a combined 27.6% share. The product has amassed $863.9 million in its asset base and charges 43 bps in annual fees. It has a Zacks ETF Rank #3 with a High risk outlook (read: Winning ETF Strategies for the Fourth Quarter).

PulteGroup Inc. PHM: This company is primarily engaged in the homebuilding business in the United States. It is involved in the acquisition and development of land primarily for residential purposes; and the construction of housing on such land. It has a Zacks Rank #3 and an Earnings ESP of +6.88%. The stock saw solid earnings estimate revision of 12 cents over the past 90 days for the third quarter, representing a whopping growth of 58.33%, and delivered a positive earnings surprise of 14.31% for the past four quarters. The company is slated to release earnings results on Oct 23.

Basic Materials

First Trust Materials AlphaDEX Fund FXZ: This product follows the StrataQuant Materials Index, holding 51 stocks in its basket. None of the securities holds more than 3.5% share. The fund has accumulated $204.1 million in its asset base and charges 65 bps in annual fees. It has a Zacks ETF Rank #2 with a Medium risk outlook.

CF Industries Holdings Inc. CF: This is the global leader in transforming natural gas into nitrogen products. It has a Zacks Rank #1 and an Earnings ESP of +12.07%. The Zacks Consensus Estimate for the yet-to-be reported quarter has been revised upward from a loss of 6 cents to an earnings of 12 over the past 90 days. The stock also delivered average earnings surprise of 44.58% for the last four quarters. The company is slated to release earnings results on Nov 7. You can see the complete list of today’s Zacks #1 Rank stocks here.

Finance

Financial Select Sector SPDR Fund XLF: This fund follows the Financial Select Sector Index and holds 67 stocks in its basket with higher concentration on the top two firms. Banks dominate the fund’s portfolio with 44.3% while capital markets, insurance and diversified financial services. The fund has accumulated nearly $29.9 billion in AUM and charges investors 13 bps in annual fees. It has a Zacks ETF Rank #2 with a Medium risk outlook (read: Here's Why Should You Buy Financial ETFs).

Prudential Financial Inc. PRU: This company provides insurance, investment management, and other financial products and services in the United States and internationally. It has a Zacks Rank #2 and an Earnings ESP of +0.27%. The stock saw positive earnings estimate revision of a penny for the yet-to-be-reported quarter in the past three months and has an expected growth rate of 4.32%. For the last four quarter, the positive earnings surprise is 3.82%. The company is slated to release earnings results on Nov 7.

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