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An Investment Strategy for Q3 Earnings in a Volatile Market

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This week the third-quarter 2020 earnings season has kickstarted  and volatility has returned after causing market turmoil last month. Although earnings results are better than expected in the very early period of this cycle, other macro economic and political factors have flared up market fluctuations.

At this stage, it will be prudent to invest in low-beta (beta value less than 1 but greater than zero) stocks with a favorable Zacks Rank as these will be less volatile than the broader market. On Oct 21, seven such companies are set to beat on earnings results and witness an uptrend in their stock prices in near future.

Consequently, investment in low-beats stocks with a favorable Zacks Rank and positive Earnings ESP will be a sound strategy to enhance one's portfolio.    

Sources of Volatility in October

First, on Oct 14, U.S. Treasury Secretary Steven Mnuchin expressed concerns that the second round of coronavirus-aid package is unlikely to come before the U.S. presidential election scheduled on Nov 3. The U.S. Congress has failed to reach a solution regarding the size and scope of a fresh fiscal stimulus despite negotiating for more than two months.

Second, it seems a remote possibility that a vaccine or a proper line of treatment for COVID-19 will appear this year. This week the FDA has paused late-stage clinical trials of two drugs for the potential treatment of conronavirus on safety concerns. Meanwhile, several states and regions in the United States and major Eurozone countries have recently witnessed another spike in COVID-19 infections as these economies are trying to return to normalcy.

Third, the U.S. presidential election is less than three weeks away. Historically, stock markets have remained volatile during the month before the election. Market participants generally choose to hold cash instead of investing in risky assets like equities while assessing the economic and financial consequences of the election result.

Solid Q3 Earnings Results So Far

The third-quarter earnings season has started on a strong note though overall earnings are likely to remain negative this quarter. As of Oct 14, 36 S&P 500 companies have reported results. Total earnings of these companies are down 14.1% from the same period last year on 1% lower revenues, with 88.9% beating EPS estimates and 75% surpassing revenue estimates.

Meanwhile, for the quarter as a whole, total S&P 500 earnings are expected to decline 19.3% on 2.5% lower revenues. This is an improvement over an earnings decline of 22% year over year on 2.9% lower revenues, as projected before the starting of the reporting cycle.

Notably, overall projections for third-quarter earnings have gradually improved since July, on the reopening of a large part of the U.S. economy. Importantly, the pace of improvement has started accelerating as companies have come up with better-than-expected results. (Read More: Good Start to Q3 Earnings Season)

Our Top Picks

We have narrowed down our search to seven low-beta stocks that are slated to release earnings results on Oct 21. Each of these stocks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy) and has a positive Earnings ESP. You can see the complete list of today’s Zacks #1 Rank stocks here.

Our research shows that for stocks with the combination of a Zacks Rank #3 (Hold) or better and a positive Earnings ESP, the chance of an earnings beat is as high as 70%. These stocks are anticipated to appreciate after earnings releases. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The chart below shows the price performance of our seven picks in the third quarter.

 

Abbott Laboratories (ABT - Free Report) discovers, develops, manufactures and sells a diversified line of health care products worldwide. This Zacks Rank # 2 company has an Earnings ESP of +5.30%. Abbott Laboratories has an expected earnings growth rate of 1.9% for the current year.

The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the last 7 days. It has a trailing four-quarter earnings surprise of 12.7%, on average. The company has a beta of 0.92 and is set to release earnings results on Oct 21, before the opening bell.

NextEra Energy Inc. (NEE - Free Report) generates, transmits, distributes, and sells electric power to retail and wholesale customers in North America through its  wind, solar, nuclear and natural gas-fired facilities. The company has an Earnings ESP of +0.92%.

NextEra Energy has an expected earnings growth rate of 9.4% for the current year. The Zacks Consensus Estimate for the current year has improved 0.3% over the last 30 days. It has a trailing four-quarter earnings surprise of 2.7%, on average. The Zacks Rank #2 company has a beta of 0.20 and is set to release earnings results on Oct 21, before the opening bell.

Silgan Holdings Inc. (SLGN - Free Report) manufactures and sells rigid packaging for consumer goods products in North America, Europe, and internationally. It operates through three segments: Metal Containers, Closures, and Plastic Containers. This Zacks Rank # 2 company has an Earnings ESP of +3.81%.

Silgan Holdings has an expected earnings growth rate of 31.9% for the current year. The Zacks Consensus Estimate for the current year has improved 0.4% over the last 30 days. It has a trailing four-quarter earnings surprise of 12.8%, on average. The company has a beta of 0.72 and is set to release earnings results on Oct 21, before the opening bell.

UniFirst Corp. (UNF - Free Report) provides workplace uniforms and protective work wear clothing in the United States, Europe, and Canada. It operates through U.S. Rental and Cleaning, Canadian Rental and Cleaning, Manufacturing, Specialty Garments Rental and Cleaning, and First Aid segments. This Zacks Rank # 2 company has an Earnings ESP of +12.07% for the fourth-quarter fiscal 2020 (ended August 2020).

The Zacks Consensus Estimate for UniFirst for the current year has improved 0.4% over the last 30 days. It has a trailing four-quarter earnings surprise of 13.3%, on average. The company has a beta of 0.89 and is set to release earnings results on Oct 21, before the opening bell.

Landstar System Inc. (LSTR - Free Report) provides integrated transportation management solutions in the United States, Canada, Mexico, and internationally. It operates through two segments, Transportation Logistics, and Insurance. This Zacks Rank # 1 company has an Earnings ESP of +3.58%.

The Zacks Consensus Estimate for Landstar System for the current year has improved 8.9% over the last 30 days. It has a trailing four-quarter earnings surprise of 3.2%, on average. The company has a beta of 0.65 and is set to release earnings results on Oct 21, after the closing bell.

CVB Financial  Corp. (CVBF - Free Report) has emphasized personalized service combined with offering a full range of banking and trust services to businesses, professionals and individuals located in the service areas of its offices. This Zacks Rank # 2 company has an Earnings ESP of +4.05%.

The Zacks Consensus Estimate for CVB Financial for the current year has improved 0.8% over the last 30 days. It has a trailing four-quarter earnings surprise of 0.5%, on average. The company has a beta of 0.65 and is set to release earnings results on Oct 21, after the closing bell.

Graco Inc. (GGG - Free Report) designs, manufactures, and markets systems and equipment used to move, measure, control, dispense, and spray fluid and powder materials worldwide. This Zacks Rank # 2 company has an Earnings ESP of +8.62%.

The Zacks Consensus Estimate for Graco for the current year has improved 0.6% over the last 7 days. It has a trailing four-quarter earnings surprise of 8.7%, on average. The company has a beta of 0.58 and is set to release earnings results on Oct 21, after the closing bell.

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