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The third-quarter 2017 earnings season is at an initial stage with just 26 S&P 500 members having reported quarterly results as of Oct 11, according to the latest Earnings Outlook.

Total earnings of these companies are up 22.5% on a year-over-year basis on 9.4% higher revenues. The majority of the growth in Q3 is expected to come from the Technology, Conglomerates and Energy sectors.

The technology space continues to be an investor favorite owing to its dynamic nature. Per the report, the sector’s total earnings are expected to grow 9.7% from the same period last year on 6.7% higher revenues.

The optimism surrounding the technology sector is well reflected in its year-to-date performance. The sector has outperformed the S&P 500 in the aforesaid period. Notably, the Technology Select Sector SPDR ETF (XLK) returned 24.8% in the year-to-date period compared with the S&P 500’s gain of 14%.

Robust Technological Development – Key Catalyst

The technology sector is benefiting from increasing demand for cloud-based platforms as well as growing adoption of Artificial Intelligence (AI) solutions, Augmented/Virtual reality devices, autonomous cars, advanced driver assisted systems (ADAS), Big Data and expanding usage of Internet of Things (IoT) related software.

Moreover, rapid development of the 5G platform is likely to be the next catalyst. Further, Blockchain is also believed to be a game changer in the technology sector, given its accelerated multi-industrial adoption over the last few years.
    
Additionally, IT spending in 2017 is also expected to recover, which bodes well for the sector. According to a research report, Gartner projects IT spending to increase 2.4% in 2017 compared with 0.3% in 2016.

However, shortage of key components like DRAM, SSD and LCD panels has been increasing PC prices leading to a decline in the PC shipments, which is a concern.

How to Make the Right Pick?

Given the existence of a number of industry players, finding the right stocks that have the potential to beat earnings could be a daunting task. Our proprietary methodology, however, makes it fairly simple for you. You could narrow down the list of choices by looking at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP.

Earnings ESP is our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Our Choices

Given below are five technology providers that have the right combination of elements to post an earnings beat this quarter:

Applied Materials Inc. (AMAT - Free Report) – Santa Clara, CA-based Applied Materials is a leading supplier of fabrication equipment to semiconductor, LCD and solar PV cell manufacturers.  Notably, the company has beaten the Zacks Consensus Estimate in the preceding four quarters, with an average positive earnings surprise of 2.66%.

The company is expected to report fiscal fourth-quarter 2017 results on Nov 16. Currently, Applied Materials has an Earnings ESP of +0.37% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Extreme Networks Inc. (EXTR - Free Report) – San Jose, CA-based Extreme Networks is a leading provider of a next generation of switching solutions that meet the increasing needs of enterprise local area networks, Internet service providers and content providers. We note that the company has beaten the Zacks Consensus Estimate in the trailing four quarters, with an average positive earnings surprise of 28.14%.

The company is expected to report fiscal first-quarter 2018 results on Nov 7. Currently, Extreme Networks has an Earnings ESP of +9.75% and carries a Zacks Rank #1.

Kemet Corporation (KEM - Free Report) – Simpsonville, SC-based Kemet is one of the leading manufacturers of solid tantalum capacitors and multilayer ceramic capacitors. We note that the company has beaten the Zacks Consensus Estimate in the trailing four quarters, with an average positive earnings surprise of 64.79%.

This Zacks Rank #1 stock has an Earnings ESP of +7.46%. The company is anticipated to report fiscal second-quarter 2018 results on Nov 7.

Vishay Intertechnology Inc. (VSH - Free Report) - Malvern, PA-based Vishay is a global manufacturer and supplier of discrete semiconductors and passive components. We note that the company has beaten the Zacks Consensus Estimate twice in the preceding four quarters, delivering an average positive earnings surprise of 3.33%.

This Zacks Rank #1 stock has an Earnings ESP of +6.19%. The company is set to report third-quarter 2017 results on Oct 26.

Yelp Inc. (YELP - Free Report) – Headquartered in San Francisco, CA, Yelp is a social networking platform engaged in providing information to users. We note that the company has beaten the Zacks Consensus Estimate in the preceding four quarters, with an average positive earnings surprise of 512.5%.

This Zacks Rank #1 stock has an Earnings ESP of +100%. The company is expected to report third-quarter 2017 results on Nov 1.

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