The massive sell-off that started earlier this month due to the fear of faster rate hikes in 2018 seems to have subsided as reflected in the last few trading days. Investors are beginning to gain confidence due to robust U.S. economic fundamentals and yet another impressive earnings season hinting at a brighter future.
We are at the tail end of the fourth-quarter 2017 reporting cycle, which has provided an encouraging picture of all-around strength and momentum. We have positive earnings and sales surprises coming from an above-average proportion of companies. Further, positive estimate revisions for the current quarter have been overwhelming, indicating there is more room for growth in future.
With the overall scenario so bright, it is of little wonder that 14 of the 16 Zacks sectors are projected to end the reporting cycle with earnings growth, per the latest Zacks Earnings Preview. Of these, one is the widely-diversified Zacks Computer and Technology sector. The bottom line for this sector is projected to increase 22.6% on 10.6% higher revenues.
The solid growth projections can be mainly attributed to the rising demand for cloud-based platforms, rapid adoption of Artificial Intelligence (AI) tools, Augmented/Virtual (AR/VR) reality devices, autonomous cars, advanced driver assisted systems (ADAS), as well as Internet of Things (IoT) related software and hardware.
The sector is poised to witness tremendous growth this earnings season, and there is a high probability that various tech stocks will report better-than-expected results. It commonly happens that an earnings beat boosts investors’ confidence in the stock, which is reflected in its rapid price appreciation.
Going ahead, the technology sector is likely to grow further in 2018, as evident from the recent forecast provided by Gartner Inc. (IT) on worldwide IT spending. The latest report from the independent research firm projects global IT spending to reach $3.7 trillion this year, representing an increase of 4.3% from $3.5 trillion projected in 2017.
However, in our opinion, the major push will come from the recently-passed Tax Cuts and Jobs Act or the tax bill as it will bring double benefit for tech companies. Firstly, it will boost corporate earnings and secondly, as companies across other sectors might utilize savings from lower tax, as well as cash repatriations for technological upgradation, this will again be conducive for the tech stocks.
Therefore, now it is wise to invest in such stocks, in order to catch the post-earnings rally. However, this is easier said than done. Striking the right chord needs a fair amount of luck.
Then How to Make the Right Pick?
With the existence of a number of companies in the tech sector, finding the right stocks that have the potential to beat on 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. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP is our proprietary methodology for determining stocks which have the best chances 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%.
Here, we would like to highlight some stocks in the technology sector which are likely to beat estimates this earnings season.
6 Prominent Picks
Micron Technology, Inc. (MU - Free Report) is a solid bet which flaunts a Zacks Rank #1 and has an Earnings ESP of +1.83%. The company delivered an outstanding average positive earnings surprise of approximately 10.2%, over the trailing four quarters and has long-term earnings growth expectation of 10%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Broadcom Limited (AVGO - Free Report) is one such technology stock that investors can opt for. The stock carries a Zacks Rank #2 and has an Earnings ESP of +1.08%. Last quarter, the company posted a positive earnings surprise of 2% and has long-term earnings growth rate of 13.8%.
We also suggest investing in Fitbit, Inc. (FIT - Free Report) . The company has an Earnings ESP of +100.00% and carries a Zacks Rank #3. The stock has surpassed the Zacks Consensus Estimate thrice and missed on one occasion, over the preceding four quarters. It has an average positive earnings surprise of 28.3% and has long-term earnings growth expectation of 25.2%.
Another stock that you can consider is Universal Display Corporation (OLED - Free Report) , with a Zacks Rank #3 and an Earnings ESP of +2.44%. The stock has surpassed the Zacks Consensus Estimate over the last four quarters with an average positive earnings surprise of 599.4% and has an earnings growth expectation of 30% for 2018.
One can also invest in Nutanix Inc. (NTNX - Free Report) , which carries a Zacks Rank #3 and has an Earnings ESP of +0.29%. The company registered an average positive earnings surprise of 18.4% over the trailing four quarters and has long-term earnings growth rate of 20%.
Investors can also count on Cohu, Inc. (COHU - Free Report) , with a Zacks Rank #3 and an Earnings ESP of +2.13%. The stock has surpassed the Zacks Consensus Estimate in each of the trailing four quarters with an average positive earnings surprise of 63.1% and has an earnings growth expectation of 10.8% for 2018.
These stocks have managed to grab the spotlight with notable performances. The factors make us more or less sure that investing in these stocks will yield strong returns for your portfolio in the short term.
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