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4 Sector ETFs & Stocks to Bet on Q4 Earnings

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The Q4 earnings picture has been improving since the start of the quarter given the rollout of COVID-19 vaccines and optimism that the economy is coming out of the pandemic-led slump. This is especially true as S&P 500 earnings are expected to decline 10.4% despite 0.3% higher revenues. The earnings projection reflects an improvement from the 13.4% earnings decline expected at the end of the third quarter and follows the 7% earnings drop in Q3.

Earnings growth is expected to be negative for 11 of the 16 Zacks sectors. Transportation and energy are expected to be the biggest drags with expected earnings decline of 99.8% and 91.6%, respectively. Sectors with positive earnings growth in Q4 include autos (86.3% earnings growth), construction (27.2%), basic materials (7.6%), medical (6.3%), and aerospace (4.4%).

Given this, we have highlighted one ETF and one stock from the four sectors that could make great plays as the earnings season unfolds. These ETFs and stocks have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

For stocks, we have added the extra criteria of a positive Earnings ESP. The combination of a Zacks Rank #3 or better and a positive ESP increases the odds of an earnings beat by 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Autos

The auto industry is benefiting from vaccine optimism, which will spur economic growth and lead to higher demand for vehicles. Persistent lower interest rates are also encouraging new-car buying, pushing more consumers to avail loans.

First Trust NASDAQ Global Auto ETF (CARZ - Free Report) : This fund offers a pure-play global exposure to 34 auto stocks by tracking the NASDAQ OMX Global Auto Index. It has a moderate concentration across components as each of these make up for less than 8.2% share. CARZ has a lower level of $51.3 million in AUM and trades in a small average daily trading volume of about 23,000 shares. The product charges 70 bps in fees per year and has a Zacks ETF Rank #3 with High risk outlook (read: 5 ETFs Set to Soar on Tesla's Robust Q4 Deliveries).

The Goodyear Tire & Rubber Company (GT - Free Report) : It is one of the largest tire manufacturing companies in the world, selling under Goodyear, Kelly, Dunlop, Fulda, Debica, Sava and various other “house” brands (such as, Lee, Kingstone, Douglas, Mohave and Republic) as well as private-label brands (namely, Roadhandler, Star and Monarch). The stock has a Zacks Rank #2 and an Earnings ESP of +146.09%. The Zacks Consensus Estimate for the to-be-reported quarter has been revised upward by 6 cents over the past 30 days and has expected 36.8% earnings growth. Additionally, the company delivered a positive four-quarter earnings surprise of 11.85%, on average, and is scheduled to report earnings on Feb 9, 2021.

Construction

This sector has been gaining from record-low mortgage rates and higher demand for new homes. Lower mortgage rates are encouraging people to buy more homes and have made refinance cheaper. The trend is likely to continue at least this year on the Fed’s super easy money policy (read: Ride the Housing Market Momentum With These ETFs).

iShares U.S. Home Construction ETF (ITB - Free Report) : This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $2 billion, it holds a basket of 46 stocks with heavy concentration on the top two firms. The product charges 42 bps in annual fees and trades in heavy volume of around 3.1 million shares a day on average. It has a Zacks ETF Rank #3 with a High risk outlook.

M.D.C. Holdings Inc. (MDC - Free Report) : This company is engaged in homebuilding and financial service businesses in the United States. The stock has a Zacks Rank #2 and an Earnings ESP of +2.22%. The Zacks Consensus Estimate for the to-be-reported quarter has been revised upward by a couple of cents over the past 30 days and has expected 20.4% earnings growth. Additionally, the company delivered a positive four-quarter earnings surprise of 19.61%, on average, and is scheduled to report earnings on Feb 2.

Materials

Being cyclical in nature, basic material companies are expected to gain as vaccination has set the stage for a speedy recovery thereby boosting demand for several types of products and services in the economy.

iShares U.S. Basic Materials ETF (IYM - Free Report) : With AUM of $633.2 million, this ETF tracks the Dow Jones U.S. Basic Materials Index and holds 35 stocks in its basket. It charges 43 bps in annual fees and trades in a good average daily volume of around 182,000 shares a day. The product is heavily skewed toward specialty chemical and industrial gases with 30.8% and 26.9% of the portfolio, respectively. It has a Zacks ETF Rank #2 and a High risk outlook (read: Top-Ranked Material ETFs to Park Your Money in This Year).

Bunge Limited (BG - Free Report) : It is an integrated global agribusiness and food company spanning the farm-to-consumer food chain. The stock has a Zacks Rank #1 and an Earnings ESP of +29.82%. The stock has seen a solid earnings estimate revision of 22 cents for the to-be-reported quarter over the past month and has an expected earnings growth rate of 17.3%. Its trailing four-quarter earnings surprise is 374.77%, on average. The company is slated to release earnings results on Jan 29.

Medical

The medical sector is getting boost by the progress in the development of a coronavirus vaccine or treatment, and waves of mergers and acquisitions.

Health Care Select Sector SPDR Fund (XLV - Free Report) : The most-popular healthcare ETF, XLV follows the Health Care Select Sector Index. This fund manages nearly $26.1 billion in its asset base and trades in heavy volume of around 8.8 million shares. In total, the fund holds 63 securities in its basket with key holdings in healthcare equipment and supplies, pharma, healthcare providers and services, and biotech. It charges 13 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook (read: ETFs to Gain on UnitedHealth and Change Healthcare Deal).

McKesson Corporation (MCK - Free Report) : It is a health care services and information technology company. The stock has a Zacks Rank #2 and an Earnings ESP of +0.21%. The Zacks Consensus Estimate for the to-be-reported quarter has been revised upward by a penny over the past month and represents year-over-year growth of 7.8%. The company’s trailing four-quarter positive earnings surprise is 13.42%, on average. The company is slated to release earnings results on Feb 2.

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