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Any Bright Spot in Q1 Earnings? Sector ETFs & Stocks to Buy

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First-quarter results are likely to be bleak, given that the coronavirus outbreak has hurt economic and business activities, thereby weighing on corporate profits.

In particular, a large number of companies have warned that the epidemic will prevent them from meeting sales or profit targets for the first three months of the year. Revenues of restaurants, hotels, movie theaters, gyms, and airlines have been badly hit with many of them on the brink of bankruptcy. Further, oil price has collapsed due to waning demand triggered by the disease.

As such, S&P 500 earnings are expected to decline 8.6% year over year despite 1.6% higher revenues. The earnings projection is down from around 4% earnings growth expected in early January and indicates bigger decline when compared to the recent quarters. Earnings growth is expected to be negative for 11 of the 16 Zacks sectors. Autos and energy are expected to be the biggest drags with expected earnings decline of 68.3% and 42.4%, respectively (read: Is the 'Worst Behind Us'? ETFs to Buy).

Given the dismal picture, investors could place their bet on sectors that are expected to post earnings growth. Business services and construction are expected to post strong earnings growth of 4.9% and 4.1%, respectively, followed by utilities (2%), medical (1%), and consumer staples (0.7%).

We have highlighted one ETF and one stock from these sectors that could make great plays as the earnings season unfolds. These ETFs and stocks have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). For stocks, we have added the extra criteria of a VGM Score of B or better and a positive Earnings ESP. The combination of a Zacks Rank #3 or better and a positive ESP increases the odds of an earnings beat by 70%.
    
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Business Services

ETFMG Prime Mobile Payments ETF (IPAY - Free Report) : This ETF targets the mobile payments industry and tracks the Prime Mobile Payments Index. It capitalizes on the transition from cash/physical credit card payments to a mobile/digital system, charging investors 75 bps in annual fees. The fund holds 39 stocks in its basket with AUM of $511.6 million and average daily volume of 250,000 shares (read: 5 Sector ETFs at the Forefront of Wall Street Rally).

Huron Consulting Group Inc. HURN: It is the parent company of Huron Consulting Services, an independent provider of financial and operational consulting services. The stock has a Zacks Rank #2 and an Earnings ESP of +3.20%. It saw positive earnings estimate revision of a penny over the past seven days for the to-be-reported quarter and has an estimated year-over-year growth rate of 5%. The company’s trailing four-quarter earnings surprise is 22.76%, on average. It is slated to release earnings on May 5.

Construction

iShares U.S. Home Construction ETF (ITB - Free Report) : This ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. It holds a basket of 44 stocks and charges 42 bps in annual fees. Homebuilding takes the top spot at 67.7%, followed by 12.8% in building products and 9.7% in home improvement retail. The product has amassed $814.9 million in its asset base and trades in heavy volume of around 2.9 million shares a day on average. It charges 42 bps in annual fees and has a Zacks ETF Rank #2 with a High risk outlook (read: Top-Ranked ETFs & Stocks to Buy From Bargain Industries).

Meritage Homes Corporation MTH: It is primarily engaged in building and selling single-family homes for entry-level, first-time, move-up, luxury and active adult buyers in historically high-growth regions of the United States. The stock has a Zacks Rank #3 and an Earnings ESP of +4.70%. The Zacks Consensus Estimate for the to-be-reported quarter has been revised upward by 3 cents over the past 7 days and indicates substantial 72.3% earnings growth. Additionally, the company delivered a positive four-quarter earnings surprise of 22.13%, on average, and is scheduled to report earnings on Apr 28.

Utilities

Utilities Select Sector SPDR (XLU - Free Report) : With AUM of $11.5 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. Electric utilities take the top spot in terms of sectors at 62.5%, closely followed by multi utilities (32%). The product charges 13 bps in annual fees and sees heavy volume of around 20 million shares on average. It has a Zacks ETF Rank #2 with a Medium risk outlook.

Telephone and Data Systems Inc. TDS: It is a diversified telecom service provider offering wireless and wireline services in 36 states. The company has a Zacks Rank #2 and an Earnings ESP of +10.45%. The stock saw positive earnings estimate revision of a couple of cents for the to-be-reported quarter over the past seven days but earnings are expected to decline 26%. Its trailing four-quarter positive earnings surprise is 56.24%, on average. The company is slated to release earnings on May 7.

Medical

iShares U.S. Healthcare ETF (IYH - Free Report) : This fund offers exposure to U.S. healthcare equipment and services, pharmaceuticals, and biotechnology companies by tracking the Dow Jones U.S. Health Care Index. It holds 119 stocks. In terms of industrial exposure, pharma takes the top spot at 31.5%, followed by health care equipment (23.5%) and biotech (17.2%). The product has amassed nearly $2.1 billion in its asset base, while charging 43 bps in annual fees. It trades in good volume of around 74,000 shares a day and has a Zacks ETF Rank #2 with a Medium risk outlook (read: Healthcare Stocks & ETFs to Gain on Coronavirus Test Progress).

Cardinal Health Inc. CAH: This is a nationwide drug distributor and provider of services to pharmacies, healthcare providers and manufacturers. The stock has a Zacks Rank #1 and an Earnings ESP of +1.03%. The Zacks Consensus Estimate for the to-be-reported quarter has been revised upward by a penny over the past seven days and its earnings are estimated to decline 8.2%. The company’s trailing four-quarter positive earnings surprise is 18.2%, on average. The company is slated to release earnings on May 14. You can see the complete list of today’s Zacks #1 Rank stocks here.

Consumer Staples

Consumer Staples Select Sector SPDR Fund (XLP - Free Report) : This is the most-popular consumer staples ETF with AUM of $13.2 billion and follows the Consumer Staples Select Sector Index. It holds about 33 securities in its basket and charges 13 bps in fees per year from investors. From an industrial look, beverages and household products take the largest share at more than 25% each while food & staples retailing, and food [products round off the next two spots. The fund trades in heavy volume of nearly 14.3 million shares a day and has a Zacks ETF Rank #3 with a Medium risk outlook (read: ETF Strategies & Best Practices Amid Coronavirus Volatility).

The Kraft Heinz Company KHC: This company is one of the largest consumer packaged food and beverage companies in North America. It has a Zacks Rank #3 and an Earnings ESP of +1.25%. It saw positive earnings estimate revision of 4 cents over the past seven days for the to-be-reported quarter. The company’s trailing four-quarter earnings surprise is 13.36%, on average. It is slated to release earnings on May 14.

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