Stocks suffered their worst loss in percentage terms in almost a month on Tuesday after Alcoa. (AA - Free Report) posted disappointing third quarter results. These earnings numbers also cast a pall of gloom over other upcoming earnings since the aluminum major’s results traditionally marks the beginning of the reporting season.
Our estimates show that earnings growth will languish in the negative zone during the third quarter reporting season. This observation is particularly true for the basic materials sector, of which Alcoa is a part of. However, stocks from other sectors such as business services and construction are set to witness significant earnings growth and it makes good sense to add them to your portfolio.
Alcoa Disappoints, Basic Materials to Suffer
Alcoa reported third quarter earnings of 33 cents per share, lower than the Zacks Consensus Estimate of 34 cents. Adjusted earnings and sales fell short of expectations even though productivity gains continued to offset headwinds from lower metal prices. Revenues of $5,213 million trailed the Zacks Consensus Estimate of $5,334 million. (Read: Alcoa (AA - Free Report) Misses Q3 Earnings, Sales Estimates; Shares Tank)
These numbers are indicative of what is likely to come from basic materials stocks’ results. The sector is likely to record a near 2.1% decline in earnings and 3.2% decline in revenue for the September-ended quarter. Prevailing global uncertainties have been impacting the materials stocks over the last few quarters. The sector was one of worst performing Zacks sectors in September. (Read: 5 Material Stocks Worth Buying Despite September Setback)
Select Sectors Offer Promise
As a whole, earning results for the third quarter are likely to disappoint investors. Earnings growth for S&P 500 stocks is expected to remain negative for the sixth successive quarter. Total earnings for the index are expected to be down -3% from the same period last year on +1.2% higher revenues. Among the industry groups, energy is likely to emerge as the poorest performer
However, it’s not all gloom and doom during this reporting period. On the positive side, Business Services (earnings growth of 7%), Construction (6.4%), Utilities (4.6%) and Finance (4%) are some of the sectors expected to produce modestly higher earnings relative to the same period last year. Earnings growth is expected to bounce back during the fourth reporting quarter. (Read: Will Earnings Growth Resume After the Q3 Earnings Season?)
Despite a weak beginning and discouraging forecasts, it’s not going to be a poor third quarter for all the sectors. In fact, some of them, specifically, business services, construction, utilities and finance are likely to record earnings growth.
This is why it would be prudent to pick select stocks from these sectors. We have narrowed down our search based on a good Zacks Rank and Zacks Earnings ESP. The Zacks Earnings ESP compares the most accurate estimate to the broad consensus, looking to find stocks that have seen big revisions as of late, suggesting that analysts have recently become more bullish on the company’s earnings prospects.
And when you add this solid Zacks Rank to a positive Earnings ESP, a positive earnings surprise happens nearly 70% of the time. So it seems pretty likely that the following stocks could see another beat at their next reports, especially if recent trends are any guide.
Crown Castle International Corp. (CCI - Free Report) is a leading independent operator of wireless communication towers in the U.S. and Australia.
Crown Castle has a Zacks Rank #1 (Strong Buy) and the current Earnings ESP is +1.77%. Its last EPS surprise was 5.45% and the one before that was 8.26%. Average EPS surprise over the last four quarters is 3.93%. The company is expected to report earnings on Oct 20, 2016.
Louisiana-Pacific Corp. (LPX - Free Report) manufactures building materials and engineered wood products in the U.S., Canada, Chile and Brazil.
Louisiana-Pacific has a Zacks Rank #1 and the current Earnings ESP is +2.5%. Its last EPS surprise was 12% and the previous EPS surprise was 250%. Average EPS surprise over the last four quarters is 53%. The company is expected to report earnings on Oct 31, 2016.
S&P Global, Inc. (SPGI - Free Report) formerly known as McGraw-Hill Financial, is the provider of financial information, and the owner of one of the top credit rating agencies (Standard & Poor’s).
S&P Global has a Zacks Rank #2 (Buy) and the current Earnings ESP is +2.99%. Its last EPS surprise was 8.27% and the previous EPS surprise was 4.35%. Average EPS surprise over the last four quarters is 6.70%. The company is expected to report earnings on Nov 1, 2016.
DTE Energy Company (DTE - Free Report) is a holding company with subsidiaries engaged in regulated and unregulated energy businesses.
DTE Energy has a Zacks Rank #2 and the current Earnings ESP is +3.36%. Its last EPS surprise was 8.89%. Average EPS surprise over the last four quarters is 6.94%. The company is expected to report earnings on Oct 28, 2016.
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