It has been a roller-coaster ride for the U.S. equity market since the beginning of 2018.
The implementation of the U.S. Tax Cuts and Jobs Act in December last year was wholeheartedly welcomed by the market, as evident from rallies in major domestic indexes in January. Nonetheless, this uptrend was short-lived as fears of inflation gripped the market in February, pulling down the major indexes for a while. Further, in March, President Trump announced the imposition of import tariffs of 25% on steel and 10% on aluminium.
Thereafter, apprehensions about retaliatory measures coming from foreign nations, especially China, have been affecting investor sentiments. Also, weakness in the tech stocks has been a burning issue along with recent indications of a possible military attack on Syria.
Corrections in connection to the prevalent uncertainties have turned year-to-date yields of the country’s prime stock indexes red. While the S&P 500 has lost nearly 1.2%, Dow Jones Industrial Average has declined 2.1% and the NYSE dipped 2.3%. However, Nasdaq has gained nearly 2.4% during the same time frame.
Now we await the corporate earnings releases for the January-March quarter (or the first quarter) of 2018. The season has already begun and will be in full swing from the next week. We here focus on the top-ranked sector — Industrial Products — which is among the 16 broad Zacks sectors.
The Industrial Sector’s Trends
The sector has retained its top ranking this week and has also topped the Zacks Heat Map for the fifth consecutive week. (To learn more visit: About Zacks Sector Rank)
Major propellers for the industrial companies are strengthening housing market, impressive job data and investment-friendly government policies. Also, healthy growth in industrial production and strengthening manufacturing sector, evident from the ISM’s Purchasing Managers’ index trend, are supporting the positive momentum.
Despite the strong fundamentals, the Industrial sector has lost 8% year to date, wider than declines registered by the S&P 500, Dow Jones Industrial Average and the NYSE. Some companies are believed to have lost ground reacting primarily to the negative sentiments prevalent in the market and some internal issues while many still represent good investment options.
Per the Earnings Trends published on Apr 11, earnings for the Industrial Products companies in the S&P 500 group are predicted to increase 24.1% year over year in the quarter on revenue growth of 12.5%. Margins will likely grow 0.9%. The positive appeal gets a bit dimmed, if these projections are compared with year-over-year growth rates of 34.8% for earnings, 14.5% for revenues and 1.5% for margins recorded in the fourth quarter of 2017 (September-December quarter). Also, a decelerating trend can be seen in growth rates of earnings and revenues for three-month period upto the first quarter of 2019.
In-House Tools to Judge the Stocks
Investment decisions, especially before earnings announcements, can be taken by using some of our in-house tools. A popular way of deciding is to opt for stocks that possess a combination of favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or (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.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Earnings ESP is the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. The combination of favorable ranking and positive Earnings ESP suggests that a stock has a high probability of beating estimates in the to-be reported quarter.
Investor can try and optimize their portfolio returns through the above-mentioned way while can also try and minimize losses by avoiding stocks that have high probability of lagging estimates. The second can be achieved by refraining from investing in stocks that possess a combination of Zacks Rank #4 (Sell) or 5 (Strong Sell) and a negative Earnings ESP.
We have zeroed in on to three stocks that should preferably be avoided ahead of earnings. A brief discussion on these stocks is provided below:
iRobot Corporation (IRBT - Free Report) : The company is one of leading robots manufactures in the world. It currently faces risks from stiff industry rivalry and unfavorable movements in foreign currencies while a trade with China might adversely impact its labor, raw materials and other related supplies for its home robotic products.
The company, with approximately $1.9 billion market capitalization, carries a Zacks Rank #4. Its Earnings ESP for the first quarter of 2018 is -17.29%. The Zacks Consensus Estimate for the to-be-reported quarter is 53 cents.
Also, the stock’s earnings estimates for 2018 have been lowered by one brokerage firm in the last 60 days. The Zacks Consensus Estimate is pegged at $2.30, reflecting 6.5% fall from the tally 60 days ago.
Year to date, iRobot’s stock has lost 12.9%, wider than 11.7% decline recorded by the industry it belongs to.
The company is scheduled to release its results on Apr 24, after the market closes.
Mueller Water Products, Inc. (MWA - Free Report) : The company manufactures and distributes products related for safe transmission of drinking water as well as provides related services.
With $1.7 billion market capitalization, the company carries a Zacks Rank #4. Its Earnings ESP for the second-quarter of fiscal 2018 (ended March 2018) is -7.32%. The Zacks Consensus Estimate for the to-be-reported quarter has remained stable at 10 cents in the last 60 days.
Also, the stock’s earnings estimates for fiscal 2018 (ending September 2018) have remained stable at 54 cents in the last 60 days, while estimates for fiscal 2019 (ending September 2019) decreased 1.5% to 65 cents.
Since the beginning of calendar year 2018, Mueller Water Products stock has lost 15.9%, underperforming 8.5% gain recorded by the industry it belongs to.
The company is expected to release its results on Apr 26.
NN, Inc. (NNBR - Free Report) : The company engages in manufacturing high-precision components for manufacturers of anti-friction bearings.
The company, with approximately $608 million market capitalization, carries a Zacks Rank #5. Its Earnings ESP for the first quarter of 2018 is -1.54%. The Zacks Consensus Estimate for the quarter has declined 23.3% to 33 cents in the last 60 days.
Also, the stock’s earnings estimates for 2018 and 2019 have been revised downward by five and two brokerage firms, respectively, in the last 60 days. The Zacks Consensus Estimate is $1.43 for 2018 and $1.94 for 2019, reflecting decline of 19.7% and 3% from the respective tallies 60 days ago.
Year to date, NN’s stock has lost 20.1%, wider than 6.6% decline recorded by the industry it belongs to.
The company is expected to release its results on May 2.
Other than the above-mentioned stocks, we caution against sell-rated stocks going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum. Some of these stocks are Actuant Corporation (ATU - Free Report) , The ExOne Company (XONE - Free Report) , Intellicheck, Inc. (IDN - Free Report) , Stanley Black & Decker, Inc. (SWK - Free Report) among others.
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