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4 Sector ETFs & Stocks to Profit from Q4 Earnings Season

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The Q4 earnings season seems to reflect improvements from Q3, when growth finally turned positive after five back-to-back quarters of decline.

This is especially true as earnings for the S&P 500 index are expected to grow 3% from the same period last year on 3.8% higher revenues, as per the Earnings Trends. Earnings growth is lower than Q3 growrth of 3.8% but revenue growth is higher than Q3 growth of 2.3%. While earnings estimates for Q4 have declined from 5.5% in the beginning of the October, the magnitude of negative revision is lower relative to the recent quarters.

The earnings strength seems broad based with 11 of the 16 Zacks sectors likely to post an earnings increase with energy being the star sector for Q4. Energy, which was the biggest drag on the earnings growth picture over the past two years, is likely to make a strong comeback for the first time after eight quarters of declines with 16.2% growth. This is followed by expected earnings growth of 10.6% for finance, 7.1% for aerospace, and 6.6% for construction (read: 5 Growth ETFs & Stocks Set for Explosive Gains in 2017).

Given this, we have highlighted one ETF and one stock from each of these sectors that could make great plays. Each of these ETFs and stocks have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). For the stocks, we have added the extra flavor of a positive Earnings ESP as stocks with this combination have a 70% chance of beating estimates when their earnings are released in the coming weeks, and a VGM Style Score of B or better.

Energy

SPDR S&P Oil & Gas Equipment & Services ETF XES: This fund tracks the S&P Oil & Gas Equipment & Services Select Industry Index, which measures the performance of the companies engaged in the oil and gas equipment and services industry. Holding 37 stocks in its basket, the fund is well spread out across various components with each holding less than 4.4% share. The product focuses mainly on equipment and services at 66.3%, while drilling companies account for the remainder. The fund has amassed $312.6 million in its asset base and trades in a good volume of more than 485,000 shares a day on average. The ETF charges 35 bps in annual fees and has a Zacks ETF Rank of 3 with a High risk outlook (read: Should You Buy the Dip in Oil Services ETFs?).

EQT Corporation EQT: This Zacks Rank #2 company with a VGM Style Score of B is an integrated energy company engaged in Appalachian area natural gas activities, including production, gathering and processing, and distribution, transmission, storage and marketing. It has an Earnings ESP of +10.00% and delivered positive earnings surprises in the last four quarters, with an average beat of 93.71%. The Zacks Consensus Estimate for fourth-quarter 2016 is a loss of 10 cents, up a penny over the past one month. The company is slated to release its earnings results before the opening bell on February 2.

Finance

Financial Select Sector SPDR Fund XLF: This is the most popular financial ETF in the space with an AUM of $22.5 billion and average daily volume of more than 59.6 million shares. It tracks the Financial Select Sector Index, holding 65 stocks in its basket. It is concentrated on the top four firms that collectively account for 38% share while the other firms hold less than 6% of assets each. In terms of industrial exposure, banks take the top spot at 45.4% while capital markets, insurance, and diversified financial services make up for double-digit exposure each. The fund charges 14 bps in annual fees and has a Zacks ETF Rank of 2 with a Medium risk outlook (read: 5 U.S. Equity ETFs Beginning 2017 with a Bang).

Citigroup Inc. (C - Free Report) : This Zacks Rank #2 company with a VGM Style Score of B is a global financial services company that provides various financial products and services for consumers, corporations, governments, and institutions worldwide. It saw solid earnings estimate revisions of four cents for the fourth quarter over the past three months, and has a substantial expected growth rate of 5.8%. It has an Earnings ESP of +1.79% and delivered positive earnings surprises in the last four quarters, with an average beat of 7.77%. Citigroup is scheduled to report its earnings results before the opening bell on January 18.

Aerospace

iShares U.S. Aerospace & Defense ETF ITA: This fund follows the Dow Jones U.S. Select Aerospace & Defense Index, holding 39 stocks in its basket. It has moderate concentration on the top six firms that make up for a combined 45.04% of the portfolio. The fund has accumulated $1.8 billion in AUM while charges 44 bps in fees a year. Volume is good at around 170,000 shares. The ETF has a Zacks ETF Rank of 1 with a Medium risk outlook (read: 5 ETF Investment Ideas for 2017).

L-3 Communications Holdings Inc. LLL: This Zacks Rank #3 company with a VGM Style Score of B is a merchant supplier of sophisticated secure communication systems and specialized communication products. It has an Earnings ESP of +2.36% and delivered positive earnings surprises in the last four quarters, with an average beat of 13.65%. The stock saw positive earnings estimate revisions of a couple of cents over the past three months for the fourth quarter, representing a modest earnings decline of 1.68%. The company is slated to release earnings results on January 26.

Construction

iShares U.S. Home Construction ETF ITB: This fund provides a pure play to home construction stocks by tracking the Dow Jones U.S. Select Home Construction Index. It holds a basket of 44 stocks with double-digit allocation going to the top two firms. Other firms hold no more than 7.9% of the assets. Homebuilding takes the top spot at 65.1%, followed by 14.7% in building products and 9.0% in home improvement retail. The product has amassed $1.1 billion in its asset base and trades in heavy volume of more than 2.5 million shares a day on average. The ETF charges 44 bps in annual fees and has a Zacks ETF Rank of 2 with a High risk outlook (read: What Lies Ahead for Housing ETFs in 2017?).

Thor Industries Inc. THO: This Zacks Rank #1 company with a VGM Style Score of B designs, manufactures, and sells recreational vehicles, and related parts and accessories primarily in the United States and Canada. The stock saw solid earnings estimate revisions of 16 cents for the fourth quarter over the past 90 days, with an expected growth rate of 28.3%. It has an Earnings ESP of +2.40% and delivered positive earnings surprises in the last four quarters, with an average beat of 24.08%. Thor Industries is scheduled to report results on March 6.

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