Pre-earnings for the second calendar quarter, savvy investors know there is much to be wary of. At the same time, there are some strong, safe plays we can make within the current environment on The Street. Director of Zacks Equity Research Dirk van Dijk, CFA was around to give us a hand.
Looking toward second quarter numbers, in which industries do you see particular strength?
Energy is currently expected to win the growth derby – not exactly a shocking idea with oil currently hovering in the $140 a barrel area. Perhaps the bigger question is: Why isn’t the expected growth rate much higher than it is?
After all, the price of crude has just about doubled since this time last year. Since it cost them something to get the oil out of the ground last year one would expect that gross profits would more than double as a result. The 30.0% year-over-year growth in EPS for the sector looks very conservative to me.
How are you seeing some of the other sectors shaping up?
Well, Tech and Industrials are currently expected to win Silver and Bronze in the second quarter, with growth of 20.8% and 18.0%, respectively.
Once again, the biggest expected loser in the quarter is expected to be the Financials, with half the firms seeing a drop in their EPS of over 7.3%. Consumer Durables follows with an expected drop of 0.7%.
Given that the bulk of the stimulus checks are being mailed out in May and June, it would not surprise me if the retailers in the sector do a little bit better than expected for the quarter. However, even if that is the case, the effect would be short lived. The expected rebound to 3.4% growth in the third quarter seems to reflect slower assumptions about the pace of stimulus check disbursements than has actually happened.
Will quarterly results at last be positive for S&P 500 firms?
Total net income for the S&P 500 is expected to fall for the third straight quarter. However, the magnitude of the decline is expected to be slightly less than we saw in either the first quarter or in last years’ fourth quarter. The blame for net income decline once again goes to the Financials (with best supporting actor nomination for the Consumer Discretionary), but so does the credit for a less severe decline than last quarter.
So would you say that near-term, investors should stay overweighted in energy stocks?
Energy was far and away the strongest sector, with almost four increases for every cut. While estimate increases were widespread in the sector, firms worth highlighting would include Noble Energy (NBL) and Occidental Petroleum (OXY). From a total economic impact point of view, significant increases were also seen for all of the big three, Exxon (XOM), Chevron (CVX) and Conoco (COP).
Dirk van Dijk, CFA is the Director of Zacks Equity Research.
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