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Industry Outlook

The U.S. equity benchmarks have performed remarkably well this year, hitting multiple highs on several occasions and trumping all difficulties related to lofty valuations, slowdowns in China and Europe, a standoff between Russia and the West as well as geopolitical tensions in Ukraine and Iraq.

This has spread confidence in economic recovery headed into the second half of the year and is driving up bullishness on the Q2 earnings season that has already kicked off. Total earnings growth is expected to accelerate nearly four times to 3% from the previous quarter’s anemic growth pace. Revenues will likely grow 1% on modestly higher net margins.

Though most of the sectors are likely to post stronger earnings compared to the previous quarter, three sectors would see double-digit growth rates. It would be a good idea to zero in on the stocks of these sectors, which are not only poised to beat earnings estimates but are also expected to lead higher in the days to come.

How to Pick Stocks?

Betting on these sector stocks seem to be a winning strategy for investors, as earnings beat will definitely draw investors’ confidence and propel the stock price higher. It could be easily done by our proprietary methodology that selects stocks with a combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) – and a positive Earnings ESP.
 
Earnings ESP is our proprietary methodology for identifying stocks that have the maximum chance to surprise with their upcoming earnings announcements. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this combination, the chance of positive earnings surprise is as high as 70%.

Below, we have highlighted three sectors and one stock from each that will likely deliver an earnings beat when their earnings are released in the coming weeks.

Construction

The construction sector will likely be the major contributor to earnings this season. It is expected to report an 11.4% earnings growth year over year on 4% revenue increase.

This is because the housing market seems to be nicely improving from the hard-hit freezing temperatures, higher mortgage rates, rising home prices and a shortage of properties for sale. New home sales climbed 18.6% to a six-year high in May while existing home sales rose 6.1% to an eight-month high, suggesting encouraging construction activity in the coming months.

A top pick in this sector is United Rentals Inc. , which carries a Zacks Rank #2 and has an earnings ESP of 4.86%. The Zacks Consensus Estimate for the second quarter 2014 is $1.44, up 28.47% from the year-ago quarter. The company delivered positive earnings surprises in the last four quarters, with an average beat of 13.07%.

Based in Stamford, CT, United Rentals is one of the leading U.S. equipment rental companies. It offers equipment for rent to construction and industrial companies, manufacturers, utilities, municipalities, homeowners, government entities and other customers.

United Rentals is scheduled to report its results after the closing bell on Jul 16.

Utilities

This sector will continue to benefit from an ever-expanding population and improving economic activity that will boost demand for utility supplies like water, gas and electricity. Further, lower interest rates and flights to safety are blessing for the utilities. These attributes will likely lead to the sector’s earnings growth of 11.3% for the second quarter on 0.5% revenue growth.

One hot pick in this sector is Calpine Corp. , which carries a Zacks Rank #3 and has an earnings ESP of 120%. The Zacks Consensus Estimate for the second quarter 2014 is 5 cents, a whopping increase from a loss of 8 cents recorded in the year-ago quarter. The company delivered positive earnings surprises in the two of the last four quarters, with an average beat of 48.11%.

Based in Houston, TX, Calpine is a major U.S. power company that owns, leases and operates low-carbon, natural gas-fired and renewable geothermal power plants. The company generates electricity in a reliable and environmentally responsible manner for customers and communities it serves using advanced technologies.

The company is slated to release its earnings before the opening bell on Aug 1.

Business Services

This sector is likely to post Q2 earnings growth of 10.4% on 7.9% increase in revenues. The accelerating job market buoyed by solid hiring is propelling the sector’s growth. Notably, the economy created 288,000 jobs in June, the strongest growth since the technology boom in late 1990. The trend of healthy hiring looks more sustainable than it was in the recent past, increasing the appeal for the business service stocks.  
 
The best pick in this sector is Avis Budget Group Inc. , which carries Zacks Rank #1 and has an earnings ESP of 3.23%. The Zacks Consensus Estimate for the second quarter is 62 cents, up 24% year over year. The company delivered positive earnings surprises over the last four quarters, with an average beat of 30.79%.

Based in in Parsippany, NJ, Avis Budget Group is a leading provider of vehicle rental services. It provides car and truck rentals, car sharing and ancillary services to businesses and consumers worldwide.

The company is expected to report on Aug 5.

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