Who doesn’t want to get as lucky as Warren Buffett in the investment world? Since Berkshire Hathaway Inc.’s (BRK.B - Free Report) inception, the holding company has yielded a stellar return of nearly 21%.
Buffett’s investing style has always remained simple: buy shares in great companies and hold them for a significant period of time. These companies have reliable business models that have stood the test of time. They also generate plenty of cash and provide dividends, which are indicators of a strong and sustainable business.
Such companies tend to come from sectors such as financials, technology, and consumer discretionary. The Trump administration’s initiative to cut tax rates is already providing the much-needed windfall to financial service providers, as well as computer and software makers.
Things have been looking up for consumer stocks as well. A record low jobless rate and a series of highs for the stock market has buoyed optimism on household finances and the economy. Lest we forget, the Dow Jones had touched 23,000 in intraday trade for the first time on Oct 17. The blue-chip gauge, in fact, logged its fourth 1,000-point climb over the past 12 months, the most it has ever posted in a calendar year.
Thus, let us focus on the Oracle of Omaha’s favorite companies that are likely to make the most of the third-quarter earnings season. Such companies are positioned to report upbeat earnings results, which could eventually lead to an uptick in share price.
Trump Tax Plan
The tax code hasn't been refurbished since 1986, when President Ronald Reagan, along with a divided Congress, broadened the tax base and lowered marginal tax rates.
Recently, the House of Representatives, led by Speaker Paul Ryan, passed a $4.1-trillion budget legislation that paved the way for the much awaited tax code rewrite. Such a tax cut would include trimming the business tax rate to 20% from 35%.
The lowering of the domestic tax rate will result in repatriation of hundreds of billions of dollars in cash. This should, ultimately, boost the economy and drive interest rates. Higher interest rates boost bank profits by increasing the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities. Non-banking financial institutions should gain immensely from a rising rate environment since an increase in rates generally occurs during periods of economic strength and upbeat investor sentiments.
Moreover, big companies from the tech sector also have massive overseas cash piles. Bringing back funds held overseas will let these companies carry out share buybacks, pay dividends, and get involved in M&A activities.
The tax plan aims to create three individual tax brackets with rates of 12%, 25%, and 35%. The current top rate is 39.6%. The prospect of a cut in personal taxation is also a major driving force in the continued strength of big tech firms. With more cash in hand, investors have more room to invest in such bellwethers.
Confidence in US Economy Highest in 13 Years
The U.S. consumer sentiment index, in the meantime, touched 101.1 in October, up from 95.1 in September, as per the University of Michigan’s findings. This key economic indicator, which measures attitudes on future economic prospects, scaled its highest level since 2004.
Americans think the economic scenario right now is “as good as it gets.” The index for the current economic condition rose to 116.4 from 111.7. The U.S. economy is already growing close to the range projected by the White House, while the manufacturing and service sectors accelerated at a record pace last month.
Investors’ sentiments were buoyed by narrowing of the U.S. trade deficit and a rebound in exports in August from July. This is quite encouraging, as analysts had feared that hurricanes might affect trade data in August, with exports delayed due to storms.
Household optimism was largely driven by underlying strength in the labor market. A clearer view of last month’s labor market data, in fact, showed that keeping the effects of the hurricane aside, the U.S. employment scenario is continuing to tighten.
The unemployment rate declined to 4.2%, the lowest since February 2001, while wages increased 0.5% to average of $26.55 an hour, per the Labor Department data. In fact, in the last 12 months, hourly pay increased 2.9%, up from 2.7% in the prior month and in line with a post-recession high.
4 Warren Buffet Stocks to Consider Ahead of Q3 Earnings
As mentioned above, American business magnate Warren Buffet’s preferred sectors are poised to gain in the near term. Banking on such positives, it will be prudent to invest in four of his favorite stocks from the aforementioned sectors that are expected to report a significant uptick in Q3 earnings.
These stocks have a positive Earnings ESP. This 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. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter. These stocks also flaunt a Zacks Rank #2 (Buy).
Moody's Corporation (MCO - Free Report) is a leading provider of credit ratings, research, and analysis covering debt instruments and securities in the global capital markets.
The company is expected to report earnings results for the quarter ending in September on Nov 3. Moody's has an Earnings ESP of +4.10%. The company’s expected earnings growth rate for the current year is 16.4%, well ahead of the industry’s projected growth of 0.6%.
Visa Inc (V - Free Report) is a payments technology company that connects consumers, merchants, financial institutions, businesses, strategic partners and government entities to electronic payments.
Visa is expected to report earnings results for the September quarter on Oct 25. Visa has an Earnings ESP of +0.55%. The company’s expected earnings growth rate for the current year is 20.4%, which outpaces the industry’s projected growth of 7.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Apple Inc. (AAPL - Free Report) designs, manufactures and markets mobile communication and media devices, personal computers, and portable digital music players, and a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. Buffett especially favors this company as it creates a loyal community of users, while people love Apple’s aesthetics, ease of use, etc (read more: Why Warren Buffett Bought Apple Stock, But Not Google).
It is expected to report earnings results for the quarter ending in September on Nov 2. Apple has an Earnings ESP of +0.27%. The company’s expected earnings growth rate for the current year is 8.4%, way higher than the industry’s projected growth of 2.1%.
Wal-Mart Stores Inc (WMT - Free Report) is engaged in the operation of retail, wholesale and other units in various formats around the globe.
Wal-Mary is expected to report earnings results for the September quarter on Nov 16. Wal-Mart has an Earnings ESP of +0.14%. The company’s expected earnings growth rate for the current year is 1.3%, in contrast to the industry’s projected decline of 4.2%.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>