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ETFs & Stocks to Buy from Top Ranked Sectors for Summer
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Summer has officially kicked off, making investors wary about their portfolio. This is because summer months (from May end to early September) have been historically weak for the stock markets with sluggish trading volumes, as corroborated by the most popular trading proverb “Sell in May and Go Away” (read: 4 ETF Strategies that Deny "Sell in May and Go Away"").
As a result, most of the investors might want to avoid the seasonal decline in stocks. Additionally, the current economic fundamentals are signaling huge volatility and uncertainty in the coming months.
This is especially true given that the recent spate of upbeat economic data on inflation, industrial production, retail sales, housing and consumer confidence revived investors’ confidence in the economy after a slowdown in the first quarter. International fundamentals have also improved with stabilization in China and a jump in oil prices. All these have raised the probability of a rate hike in summer months as revealed in its latest minutes.
However, the feeble May job data released on Friday eroded some optimism from the economy and might put rate hike speculation again on the back seat. The U.S. added only 38,000 jobs last month, representing the smallest gain in more than five years, while the unemployment rate fell to the lowest level since November 2007 to 4.7% from 5% in April. Adding to the concerns are Britain's possible exit from the European Union, the U.S. election in November and slow growth in other developed and developing economies.
In such a backdrop, investors could be well served by looking at the ETFs and stocks of the top-performing sectors (read: Top & Flop ETF Performers of May).
How to Find the Top-Performing Sectors
While identifying the top-performing sector is a daunting task, the Zacks Industry Rank makes this process simpler. The Zacks Industry Rank is determined by calculating the average Zacks Rank for each stock in the industry and then assigning a rank to it. So first, we selected the best industries that have the top Zacks ranks.
A top Zacks Industry Rank means that more stocks within that group are seeing upward earnings estimate revisions. Since an industry is a group of stocks in a similar business, this is the perfect way to size it up (read: all the Top Ranked ETFs).
The Zacks Industry classification divides the business world into 16 sectors comprising 60 medium or M-level industries and 260 plus or X-level industries. We rank all 260 plus X-level industries based on the earnings outlook of the constituent companies in each. Lower scores are always better. Industries with ranks of 2.00–2.64 and 2.65–2.81 are very attractive and attractive, respectively, and are thus the top-performing ones.
Consumer Staples
Consumer staples is the most attractive sector at present with food and soaps-cosmetics leading the way followed by tobacco, publishing and miscellaneous staples. The sector is considered a defensive play as it is unaffected by economic cycles. It generally outperforms the market in periods of low growth and high uncertainty as we are witnessing now.
First Trust Consumer Staples AlphaDEX Fund (FXG - Free Report) : This ETF provides exposure to 40 consumer staples stocks by following an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom ranked 25%. It is moderately concentrated across components, with none holding more than 5.56% share. About half of the portfolio is allocated to food products followed by food & staples retailing (21.49%) and household products (10.4%). The fund has amassed $2.5 billion in its asset base while sees solid volume of 475,000 shares a day on average. Expense ratio comes in at 0.62%. The product has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: Will Consumer Staples ETFs Continue to Shine in 2016?).
Tyson Foods Inc. (TSN - Free Report) : This Arkansas-based company is one of the world’s largest producers of chicken, beef, pork and prepared foods, offering a wide range of protein-based and prepared foods products. It saw positive earnings estimate revisions of 27 cents for fiscal 2016 over the past 30 days, with an expected above-average growth rate of 36.90%. The stock has a Zacks Rank #2 or ‘Buy’ rating with a VGM Style Score of A.
Materials
The material sector has been gaining strength with robust performances in its chemical business as well as metals & mining, and steel industries. As such, non-ferrous metals and chemicals fall in the most attractive industry and are expected to continue to outperform. Additionally, the paper industry also has an attractive Zacks Industry Rank.
SPDR S&P Metals & Mining ETF (XME - Free Report) : The ETF offers broad exposure to the U.S. metal and mining industry by tracking the S&P Metals & Mining Select Industry Index. Holding 25 stocks in its basket, the fund is skewed toward the top firm at 7.4% while other firms hold less than 6% share. In terms of industrial exposure, steel makes up a large chunk at 50.6%, while silver and diversified metals & mining round out the next two spots with a double-digit allocation each. The product has $584.9 million in AUM and trades in a solid volume of around 6.2 million shares per day on average. It charges 35 bps in fees and expenses.
ArcelorMittal (MT - Free Report) : This Luxembourg-based company is the world's leading steel and mining company. The stock saw impressive estimate revision to earnings of 5 cents per share from a loss of 19 cents over the past 30 days for this year. Further, it is expected to grow at an explosive rate of 129.63% this year versus the industry average of 45.57%. The stock has a Zacks Rank #2 with a VGM Style Score of B.
Consumer Discretionary
The consumer discretionary sector is also expected to outperform with home furnishing-appliances at the top, followed by other discretionary items and apparel. The sector tends to do better in the early phase of an economic recovery, characterized by stepped-up activities, accommodative policy and improving sales and profits, as per Fidelity (read: Do Not Fear Rate Hike; Play with Cyclical Sector ETFs).
PowerShares DWA Consumer Cyclicals Momentum Portfolio (PEZ - Free Report) : This fund provides exposure to 38 consumer stocks having positive relative strength (momentum) characteristics by tracking the DWA Consumer Cyclicals Technical Leaders Index. It is pretty spread out across securities with none holding more than 4.38% of assets. About 29.5% of the portfolio is dominated by specialty retail while hotel restaurants and leisure, airlines, and textiles apparel and luxury goods round off the top four positions with double-digit exposure each. PEZ is often overlooked by investors as depicted by its AUM of $61.3 million and average daily volume of 72,000 shares. The expense ratio comes in at 0.60%. The product has a Zacks ETF Rank of 2 with a Medium risk outlook.
Carter's Inc. (CRI - Free Report) : This Atlanta-based company is a leading provider of apparel and related products exclusively for babies and young children. It saw solid earnings estimate revision of 9 cents for fiscal 2016 over the past 60 days. This represents a substantial growth rate of 11.39% versus the industry average of 3.13%. The stock has a Zacks Rank #2 with a VGM Style Score of A.
Construction
Building products is also an attractive sector at present after the spring rebound in the broad sector and the ongoing summer selling season (read: Homebuilder ETFs to Buy on Upbeat Data).
PowerShares Dynamic Building & Construction Fund (PKB - Free Report) : This fund tracks the Dynamic Building & Construction Intellidex Index, holding 30 stocks in its basket. It is moderately concentrated across components, with each holding no more than 5.1% of assets. In terms of industrial exposure, specialty retail, engineering and construction, construction materials, building materials, and homebuilders make up for the top five with a double-digit allocation each. The fund has amassed assets worth $69 million while sees light volume of around 17,000 shares per day on average. Expense ratio comes in at 0.63%. PKB has a Zacks Rank of 2 with a High risk outlook.
Dycom Industries Inc. (DY - Free Report) : This Florida-based company is a leading provider of specialty contracting services such as engineering, construction, maintenance and installation for cable and telephone companies throughout the United States. It saw solid earnings estimate revision of 44 cents over the past 30 days for the current year, which represents strong earnings growth of 79.25%. The stock has a Zacks Rank #1 or ‘Strong Buy’ rating with VGM Style Score of B (read: Can Surging Housing ETFs Withstand Fed Hike Worry?).
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ETFs & Stocks to Buy from Top Ranked Sectors for Summer
Summer has officially kicked off, making investors wary about their portfolio. This is because summer months (from May end to early September) have been historically weak for the stock markets with sluggish trading volumes, as corroborated by the most popular trading proverb “Sell in May and Go Away” (read: 4 ETF Strategies that Deny "Sell in May and Go Away"").
As a result, most of the investors might want to avoid the seasonal decline in stocks. Additionally, the current economic fundamentals are signaling huge volatility and uncertainty in the coming months.
This is especially true given that the recent spate of upbeat economic data on inflation, industrial production, retail sales, housing and consumer confidence revived investors’ confidence in the economy after a slowdown in the first quarter. International fundamentals have also improved with stabilization in China and a jump in oil prices. All these have raised the probability of a rate hike in summer months as revealed in its latest minutes.
However, the feeble May job data released on Friday eroded some optimism from the economy and might put rate hike speculation again on the back seat. The U.S. added only 38,000 jobs last month, representing the smallest gain in more than five years, while the unemployment rate fell to the lowest level since November 2007 to 4.7% from 5% in April. Adding to the concerns are Britain's possible exit from the European Union, the U.S. election in November and slow growth in other developed and developing economies.
In such a backdrop, investors could be well served by looking at the ETFs and stocks of the top-performing sectors (read: Top & Flop ETF Performers of May).
How to Find the Top-Performing Sectors
While identifying the top-performing sector is a daunting task, the Zacks Industry Rank makes this process simpler. The Zacks Industry Rank is determined by calculating the average Zacks Rank for each stock in the industry and then assigning a rank to it. So first, we selected the best industries that have the top Zacks ranks.
A top Zacks Industry Rank means that more stocks within that group are seeing upward earnings estimate revisions. Since an industry is a group of stocks in a similar business, this is the perfect way to size it up (read: all the Top Ranked ETFs).
The Zacks Industry classification divides the business world into 16 sectors comprising 60 medium or M-level industries and 260 plus or X-level industries. We rank all 260 plus X-level industries based on the earnings outlook of the constituent companies in each. Lower scores are always better. Industries with ranks of 2.00–2.64 and 2.65–2.81 are very attractive and attractive, respectively, and are thus the top-performing ones.
Consumer Staples
Consumer staples is the most attractive sector at present with food and soaps-cosmetics leading the way followed by tobacco, publishing and miscellaneous staples. The sector is considered a defensive play as it is unaffected by economic cycles. It generally outperforms the market in periods of low growth and high uncertainty as we are witnessing now.
First Trust Consumer Staples AlphaDEX Fund (FXG - Free Report) : This ETF provides exposure to 40 consumer staples stocks by following an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom ranked 25%. It is moderately concentrated across components, with none holding more than 5.56% share. About half of the portfolio is allocated to food products followed by food & staples retailing (21.49%) and household products (10.4%). The fund has amassed $2.5 billion in its asset base while sees solid volume of 475,000 shares a day on average. Expense ratio comes in at 0.62%. The product has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: Will Consumer Staples ETFs Continue to Shine in 2016?).
Tyson Foods Inc. (TSN - Free Report) : This Arkansas-based company is one of the world’s largest producers of chicken, beef, pork and prepared foods, offering a wide range of protein-based and prepared foods products. It saw positive earnings estimate revisions of 27 cents for fiscal 2016 over the past 30 days, with an expected above-average growth rate of 36.90%. The stock has a Zacks Rank #2 or ‘Buy’ rating with a VGM Style Score of A.
Materials
The material sector has been gaining strength with robust performances in its chemical business as well as metals & mining, and steel industries. As such, non-ferrous metals and chemicals fall in the most attractive industry and are expected to continue to outperform. Additionally, the paper industry also has an attractive Zacks Industry Rank.
SPDR S&P Metals & Mining ETF (XME - Free Report) : The ETF offers broad exposure to the U.S. metal and mining industry by tracking the S&P Metals & Mining Select Industry Index. Holding 25 stocks in its basket, the fund is skewed toward the top firm at 7.4% while other firms hold less than 6% share. In terms of industrial exposure, steel makes up a large chunk at 50.6%, while silver and diversified metals & mining round out the next two spots with a double-digit allocation each. The product has $584.9 million in AUM and trades in a solid volume of around 6.2 million shares per day on average. It charges 35 bps in fees and expenses.
ArcelorMittal (MT - Free Report) : This Luxembourg-based company is the world's leading steel and mining company. The stock saw impressive estimate revision to earnings of 5 cents per share from a loss of 19 cents over the past 30 days for this year. Further, it is expected to grow at an explosive rate of 129.63% this year versus the industry average of 45.57%. The stock has a Zacks Rank #2 with a VGM Style Score of B.
Consumer Discretionary
The consumer discretionary sector is also expected to outperform with home furnishing-appliances at the top, followed by other discretionary items and apparel. The sector tends to do better in the early phase of an economic recovery, characterized by stepped-up activities, accommodative policy and improving sales and profits, as per Fidelity (read: Do Not Fear Rate Hike; Play with Cyclical Sector ETFs).
PowerShares DWA Consumer Cyclicals Momentum Portfolio (PEZ - Free Report) : This fund provides exposure to 38 consumer stocks having positive relative strength (momentum) characteristics by tracking the DWA Consumer Cyclicals Technical Leaders Index. It is pretty spread out across securities with none holding more than 4.38% of assets. About 29.5% of the portfolio is dominated by specialty retail while hotel restaurants and leisure, airlines, and textiles apparel and luxury goods round off the top four positions with double-digit exposure each. PEZ is often overlooked by investors as depicted by its AUM of $61.3 million and average daily volume of 72,000 shares. The expense ratio comes in at 0.60%. The product has a Zacks ETF Rank of 2 with a Medium risk outlook.
Carter's Inc. (CRI - Free Report) : This Atlanta-based company is a leading provider of apparel and related products exclusively for babies and young children. It saw solid earnings estimate revision of 9 cents for fiscal 2016 over the past 60 days. This represents a substantial growth rate of 11.39% versus the industry average of 3.13%. The stock has a Zacks Rank #2 with a VGM Style Score of A.
Construction
Building products is also an attractive sector at present after the spring rebound in the broad sector and the ongoing summer selling season (read: Homebuilder ETFs to Buy on Upbeat Data).
PowerShares Dynamic Building & Construction Fund (PKB - Free Report) : This fund tracks the Dynamic Building & Construction Intellidex Index, holding 30 stocks in its basket. It is moderately concentrated across components, with each holding no more than 5.1% of assets. In terms of industrial exposure, specialty retail, engineering and construction, construction materials, building materials, and homebuilders make up for the top five with a double-digit allocation each. The fund has amassed assets worth $69 million while sees light volume of around 17,000 shares per day on average. Expense ratio comes in at 0.63%. PKB has a Zacks Rank of 2 with a High risk outlook.
Dycom Industries Inc. (DY - Free Report) : This Florida-based company is a leading provider of specialty contracting services such as engineering, construction, maintenance and installation for cable and telephone companies throughout the United States. It saw solid earnings estimate revision of 44 cents over the past 30 days for the current year, which represents strong earnings growth of 79.25%. The stock has a Zacks Rank #1 or ‘Strong Buy’ rating with VGM Style Score of B (read: Can Surging Housing ETFs Withstand Fed Hike Worry?).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>