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Buy XOM, SLCA, CNC and R Before Earnings Reports?

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This earnings season is likely to be unexciting if the first leg is any indication. Of the hundred S&P 500 members that have reported first-quarter results so far, 77% have topped EPS estimates while 72% have topped earnings estimates. And results are weaker than those numbers indicate: total earnings for these stocks were down 2.1% on the year on 9.1% higher revenues.

What’s more, total earnings for the S&P 500 are expected to be up just 5.9% this quarter on 10.6% higher revenues (blending together actuals for these 100 index members and estimates for the still-to-come earnings reports) – and that too propped up by a super-strong energy sector.

This is a function of the labor and input cost pressures as a result of low labor participation rates and disruptive supply chain issues, respectively, that we have been seeing for a while now.

The thing is, it’s going to get much worse before it gets better. Because rate hikes remain a top priority with the Fed, which is trying to bring down demand. And obviously, demand is the only thing supporting these companies right now as they struggle with the escalation in costs. But as demand comes down, especially for durables, it will get reflected in the supply chain, which won’t have to juggle with quite as many component and finished goods. And this will help it get up to speed with deliveries.

So there’s going to be a period during which demand will come down and costs will remain high. We can only hope that this period won't last too long, or that the consumer won’t be hit so bad that we slide into a recession.

There are reasons to believe this may not happen, the most significant of which is the high employment level and high level of job openings, which is more likely to result in curtailment of spending rather than total inability, if economic conditions deteriorate. Additionally, the difficulty in acquiring human resources in the tight labor market is likely to lead employers to retain talent, even if it means temporary losses. This should lead to relative stability for the consumer.

And stability with the consumer means that things like travel, which we were all hoping would come back this year, should still come back. That has to be good news for both hospitality and airlines segments.

And that demand will be on top of industries like food and basic healthcare where demand is relatively inelastic.  

Third, there are industries like automotive where supply remains behind current demand, so production may be expected to continue provided components are available.

Fourth, there is energy. The U.S. is relatively insulated from the broader upheaval in oil and natural gas as a result of the Russia-Ukraine war, because it can produce more than internal consumption. China is a factor though because prolonged shutdowns in the country could pressure global pricing, which would be deflationary for the U.S. as well.

So basically, the Fed’s “soft landing” depends a lot on the consumer because stability here is our best chance that a recession doesn’t actually happen.

Two overheated sectors that badly need to regain equilibrium are transportation (particularly containers and freight) and construction (particularly residential). While the construction market is already correcting course, transportation bottlenecks and resultant price inflation are still a reality.

So this may be a good time to cash out of smaller cap growth companies that are underperforming. Because in a couple of months’ time, there’s likely to be more weakness as a result of the increasingly hawkish Fed. Some experts are expecting a 0.5% rate hike in May; others are afraid of an economic impact from the socio-political developments sweeping the country. When markets weaken further in a couple of months, that would likely be the right time to get into some long-term growth names. Which brings us to the topic of stock picking.

Since earnings season is ongoing with a chunk of big tech (and other) results about to be announced, it’s probably a good idea to focus on buy-ranked stocks with good potential that are set to report this week. That’s why I’ve picked a motley crowd from different industries (although there are many such options in oil & gas) that you may want to consider depending on the exposure you’re looking for:

Exxon Mobil Corporation (XOM - Free Report)

Irving, Texas-based Exxon, formerly the largest oil company in the world, hardly needs an introduction. But it’s worth noting that it is an explorer and producer of crude oil and natural gas both in the U.S. and internationally. In addition to upstream, downstream and chemical operations, Exxon transports and sells crude oil, natural gas, petroleum products, petrochemicals, and other specialty products.

It also manufactures and sells petrochemicals, including olefins, polyolefins, aromatics and various other petrochemicals. As of December 31, 2021, it had approximately 20,528 net operated wells with proved reserves.

The shares carry a Zacks Rank #1 (Strong Buy). Its Value and Growth Scores are C and A, respectively. It belongs to the Oil and Gas - Integrated - International industry (top 7% of 250+ Zacks-classified industries). It has been seen historically that a buy-ranked stock in a top-ranked industry (top 50%) has stronger chances of price appreciation in the near-term than any stock in the bottom 50% of industries.

The best part is its revenue and earnings growth, which are likely to come in at 23.1% and 74%, respectively in 2022. The strength in the earnings estimate is supported by an upwardly mobile estimate revision trend from $6.85 60 days ago to $9.36 today.

Its Earnings Surprise Prediction (ESP) is 1.83%, an indication that Exxon will beat estimates this quarter. Exxon has posted positive surprises in each of the last four quarters at an average rate of 5.8%.

U.S. Silica Holdings, Inc. (SLCA - Free Report)

Katy, Texas-based U.S. Silica Holdings produces and sells commercial silica as fracturing sand in the oil and gas industry, and whole grain silica products in various size distributions, grain shapes and chemical purity levels for the manufacturing of glass products. Various other related products are sold into foundry, manufacturing and industrial markets. Additionally, U.S. Silica offers transportation, equipment rental and contract labor services.

U.S. Silica shares carry a Zacks Rank #2 and Value and Growth Scores of B. It is part of the Mining - Miscellaneous industry (top 20%).

U.S. Silica’s revenue is expected to grow 19.0% this year and its year-ago loss of 45 cents is expected to break even. That is the result of a 34-cent improvement in its earnings estimate in the last 60 days.

Its earnings ESP of 0% is also supportive of a positive outcome this quarter. The company has posted positive surprises in each of the last four quarters, averaging 23.2%.

Centene Corporation (CNC - Free Report)

St. Louis, Missouri-based Centene Corp. provides health programs and services to under-insured and uninsured individuals in the United States. Through the Managed Care segment, Centene offers health plan coverage to individuals through government subsidized programs, including Medicaid, the State children's health insurance program, long-term services and support, foster care, and medicare-medicaid plans, which cover dually eligible individuals, as well as aged, blind, or disabled programs. This segment also offers various individual, small group and large group commercial healthcare products to employers and directly to members.

Through the Specialty Services segment it provides pharmacy benefits management services; nurse advice line and after-hours support services; vision and dental services, as well as staffing services to correctional systems and other government agencies; and services to Military Health System eligible beneficiaries. This segment offers its services and products to state programs, correctional facilities, healthcare organizations, employer groups and other commercial organizations.

Centene shares carry a Zacks Rank #2. Both its Value and Growth Scores are A. Moreover, it belongs to the Medical – HMO industry (top 32%), indicating near-term upside potential.

Centene’s earnings are expected to grow 5.2% this year on top of revenue that is expected to grow 9.0%.

The Zacks Consensus Estimate has dropped a penny lower in the last 30 days resulting in a negative ESP. This seems to indicate that the Centene will miss earnings estimates this quarter. We’ll have to wait and see. Its earnings surprise history is hardly exciting since it has missed expectations in three of the four preceding quarters. The encouraging point is that it reversed trend in the last quarter to post a positive surprise.

Ryder System, Inc. (R - Free Report)

Miami, Florida-based Ryder is a logistics and transportation company with global operations. Its three operating segments are Fleet Management Solutions (FMS), Supply Chain Solutions (SCS), and Dedicated Transportation Solutions (DTS). FMS covers things like leasing, maintenance and support services of various kinds as well as diesel fuel access, fuel planning, billing, tax reporting and used vehicle sales both from its 63 retail outlets and online. DTS covers equipment, maintenance, drivers, administrative and other services routing and scheduling, fleet sizing, safety, regulatory compliance, risk management, and technology and communication systems support services. SCS is in charge of distribution management services and includes designing and managing the customer's distribution network and facilities, coordination between its warehousing and transport facilities, material flows into and out of the premises, and value added services such as light assembly of components and other services.

Ryder shares carry a Zacks Rank #2 and Value and Growth Scores of A. It belongs to the Transportation - Equipment and Leasing industry (top 19%).

Ryder’s revenue and earnings are expected to be up a respective 11.5% and 22.1%. Its earnings estimate has jumped 60 cents in the last 60 days from $11.11 to $11.70.

What’s more, its earnings ESP is 5.0%, indicating a positive surprise this quarter. Ryder has strongly beaten analyst estimates in each of the last four quarters and the four-quarter average surprise is 57.5%.

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