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Impressed by Earnings Beat? Play These Sector ETFs
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It is not surprising that before an earnings season, every investor looks for stocks that can beat market expectations. This is because investors always try to position themselves ahead of time and look to tap stocks that are high-quality in nature.
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 consensus estimates. After all, even a 20% earnings rise (though apparently looks good) doesn’t tell you if the growth has been exhibiting a decelerating trend.
Also, seasonal fluctuations come into play sometimes. If a company’s Q1 is usually weak and Q4 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 the market perception. And if the margin of earnings 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.
So, it makes sense to look at the beat ratios of the S&P 500 companies in the Q2 reporting season. As per the Earnings Trends issued on Aug 19, 2020, as much as 93.8% of the S&P 500 members have already reported results. Of these, 80% beat on earnings in Q2 of 2020 while 62.9% surpassed revenue estimates, translating into a blended beat ratio of 55.9%.
Against this backdrop, investors must be interested in finding out the sectors that have solid blended beat ratios so far this season. Below we highlight those so that investors can decide on for their future plays.
About 74.3% companies of the sector delivered a blended beat ratio of 73.1%. As many as 76.9% companies beat on earnings while 84.6% outperformed on revenues. Low rates and government stimulus have probably have the sector alive. This should make XRT a winning proposition.
Construction – iShares U.S. Home Construction ETF (ITB - Free Report)
All companies have reported already and produced a blended beat ratio of 78.6%. Of this, earnings beat ratio is 92.9% while revenue beat ratio is 78.6%. The home-building sector has suffered a lot amid the COVID-19 lockdown, but is likely to see meaningful sales recovery ahead on low mortgage rates and a likely decline in prices.
As many as 85.7% companies of the sector have already reported and registered a blended beat ratio of 75%. There were 91.7% companies beating on earnings and 78.3% companies surpassing revenue estimates. The sector has been a true winner amid COVID-19 thanks to the rising work-and-learn-from-home trend.
Industrials – iShares U.S. Industrials ETF (IYJ - Free Report)
All companies have reported already and produced a blended beat ratio of 75.0%. Of this, earnings beat ratio is 96.4% while revenue beat ratio is 78.6%. U.S. manufacturing is recovering. The ISM Manufacturing PMI came in at 54.2 for July 2020, up from 52.6 in the previous month and ahead of market expectations of (read: Global Manufacturing Rebounding: ETFs in Focus).
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Impressed by Earnings Beat? Play These Sector ETFs
It is not surprising that before an earnings season, every investor looks for stocks that can beat market expectations. This is because investors always try to position themselves ahead of time and look to tap stocks that are high-quality in nature.
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 consensus estimates. After all, even a 20% earnings rise (though apparently looks good) doesn’t tell you if the growth has been exhibiting a decelerating trend.
Also, seasonal fluctuations come into play sometimes. If a company’s Q1 is usually weak and Q4 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 the market perception. And if the margin of earnings 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.
So, it makes sense to look at the beat ratios of the S&P 500 companies in the Q2 reporting season. As per the Earnings Trends issued on Aug 19, 2020, as much as 93.8% of the S&P 500 members have already reported results. Of these, 80% beat on earnings in Q2 of 2020 while 62.9% surpassed revenue estimates, translating into a blended beat ratio of 55.9%.
Against this backdrop, investors must be interested in finding out the sectors that have solid blended beat ratios so far this season. Below we highlight those so that investors can decide on for their future plays.
Retail – SPDR S&P Retail ETF (XRT - Free Report)
About 74.3% companies of the sector delivered a blended beat ratio of 73.1%. As many as 76.9% companies beat on earnings while 84.6% outperformed on revenues. Low rates and government stimulus have probably have the sector alive. This should make XRT a winning proposition.
Construction – iShares U.S. Home Construction ETF (ITB - Free Report)
All companies have reported already and produced a blended beat ratio of 78.6%. Of this, earnings beat ratio is 92.9% while revenue beat ratio is 78.6%. The home-building sector has suffered a lot amid the COVID-19 lockdown, but is likely to see meaningful sales recovery ahead on low mortgage rates and a likely decline in prices.
Technology – Technology Select Sector SPDR Fund (XLK - Free Report)
As many as 85.7% companies of the sector have already reported and registered a blended beat ratio of 75%. There were 91.7% companies beating on earnings and 78.3% companies surpassing revenue estimates. The sector has been a true winner amid COVID-19 thanks to the rising work-and-learn-from-home trend.
Industrials – iShares U.S. Industrials ETF (IYJ - Free Report)
All companies have reported already and produced a blended beat ratio of 75.0%. Of this, earnings beat ratio is 96.4% while revenue beat ratio is 78.6%. U.S. manufacturing is recovering. The ISM Manufacturing PMI came in at 54.2 for July 2020, up from 52.6 in the previous month and ahead of market expectations of (read: Global Manufacturing Rebounding: ETFs in Focus).
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>