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It is not surprising that before an earnings season, every investor looks for stocks that can beat market expectation. This is because investors always try to position themselves ahead of time and look to tap stocks that are high-quality in nature.
The curtains are being drawn on the Q4 earnings season as 94% of the S&P 500 companies have already came up with their results. This makes it important to note which sectors exceled on beat ratios.
Why Is a Positive Earnings Surprise So Important?
Historically, stocks of companies with solid quarterly earnings (on a nominal basis) tank if they miss or merely meet market expectations. 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 such cases, growth rates are misleading while judging the true health of a company.
On the other hand, after much brainstorming and analysis of companies’ financials and initiatives, Wall Street analysts project earnings of companies. They in fact club their insights and a company’s guidance when deriving an earnings estimate.
Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as market perception. And if the margin of surprise is big, it typically drives the stock higher right after the release. Thus, more than anything else, an earnings surprise can push a stock higher.
How Have Beat Ratios Been in Q4 of 2017?
Talking of beat ratios, we would like to note that U.S. corporate earnings have advanced quite confidently in recent quarters. As per the Earnings Trends issued on Feb 28, 2018, as much as 94% of the S&P 500 members have already reported results. Of these, 77.2% beat on earnings while 76% surpassed revenue estimates, translating into a blended beat ratio of 61.1%.
Against this backdrop, investors must be interested in finding out which sectors have solid blended beat ratios so far this season. Below we highlight those so that investors can decide on their future plays.
Technology – First Trust Dow Jones Internet Index Fund (FDN - Free Report)
As many as 95.2% companies of the sector has reported already and registered a blended beat ratio of 86.4%. The fund offers exposure to companies whose primary focus is Internet related. As many as 89.8% companies beat on revenues while 94.9% companies topped on earnings.
Auto –First Trust NASDAQ Global Auto ETF (CARZ - Free Report)
All companies have reported already and produced a blended beat ratio of 77.8%. Of this, revenue beat ratio is 100% while earnings beat ratio is 77.8%.
As many as 88.9% companies of the sector delivered a blended beat ratio of 77.1%. Within this, 87.5% companies beat on revenues while 85.4% companies exceled on earnings.
Image: Bigstock
4 Sector ETFs to Ride on Strong Beat Ratios
It is not surprising that before an earnings season, every investor looks for stocks that can beat market expectation. This is because investors always try to position themselves ahead of time and look to tap stocks that are high-quality in nature.
The curtains are being drawn on the Q4 earnings season as 94% of the S&P 500 companies have already came up with their results. This makes it important to note which sectors exceled on beat ratios.
Why Is a Positive Earnings Surprise So Important?
Historically, stocks of companies with solid quarterly earnings (on a nominal basis) tank if they miss or merely meet market expectations. 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 such cases, growth rates are misleading while judging the true health of a company.
On the other hand, after much brainstorming and analysis of companies’ financials and initiatives, Wall Street analysts project earnings of companies. They in fact club their insights and a company’s guidance when deriving an earnings estimate.
Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as market perception. And if the margin of surprise is big, it typically drives the stock higher right after the release. Thus, more than anything else, an earnings surprise can push a stock higher.
How Have Beat Ratios Been in Q4 of 2017?
Talking of beat ratios, we would like to note that U.S. corporate earnings have advanced quite confidently in recent quarters. As per the Earnings Trends issued on Feb 28, 2018, as much as 94% of the S&P 500 members have already reported results. Of these, 77.2% beat on earnings while 76% surpassed revenue estimates, translating into a blended beat ratio of 61.1%.
Against this backdrop, investors must be interested in finding out which sectors have solid blended beat ratios so far this season. Below we highlight those so that investors can decide on their future plays.
Technology – First Trust Dow Jones Internet Index Fund (FDN - Free Report)
As many as 95.2% companies of the sector has reported already and registered a blended beat ratio of 86.4%. The fund offers exposure to companies whose primary focus is Internet related. As many as 89.8% companies beat on revenues while 94.9% companies topped on earnings.
Auto –First Trust NASDAQ Global Auto ETF (CARZ - Free Report)
All companies have reported already and produced a blended beat ratio of 77.8%. Of this, revenue beat ratio is 100% while earnings beat ratio is 77.8%.
Medical – Virtus LifeSci Biotech Clinical Trials ETF (BBC - Free Report)
As many as 88.9% companies of the sector delivered a blended beat ratio of 77.1%. Within this, 87.5% companies beat on revenues while 85.4% companies exceled on earnings.
Industrial Products – PowerShares DWA Industrials Momentum Portfolio (PRN - Free Report)
All companies of the sector have reported results, with a blended beat ratio of 66.7%. Both revenue and earnings beat ratio was 83.3%.
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