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Do You Always Look for Earnings Beat? 5 Sectors to Play

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Gone are the days when investors used to be happy with just earnings growth. Now, earnings improvement (no matter how big it is) seems inadequate for solid moves in the market. It is the beat that initiates a stock price rally post earnings.

There are plenty of reasons behind this phenomenon. After all, a 20% earnings rise (though apparently looks good) doesn’t tell you if earnings growth has been exhibiting a decelerating trend. Also, seasonal fluctuations come into play sometimes. If a company’s Q1 is seasonally weak and Q4 is strong, then it is likely to report a sequential earnings decline in Q1. In such cases, growth rates are misleading while judging the true health of a company.

So, it makes sense to look at the beat ratios of the S&P 500 companies in the Q1 reporting season. As per the Earnings Trends issued on May 27, 2020, as much as 96.2% of the S&P 500 members have already reported results. Of these, 66.3% beat on earnings in Q1 of 2020 while 57.8% surpassed revenue estimates, translating into a blended beat ratio of 43.7%.

Against this backdrop, investors must be interested in finding out the sectors that have solid earnings beat ratios so far this season. Below we highlight those so that investors can decide on for their future plays.

Medical

About 98.1% companies of the sector delivered a blended beat ratio of 67.3%. As many as 86.5% companies beat on earnings while 76.9% outperformed on revenues. In any case, the wind is in favor of the medical sector investing right now (given the ongoing medical emergency of coronavirus).

Zacks Rank #2 (Buy) DexCom Inc. (DXCM - Free Report) , Sarepta Therapeutics Inc. (SRPT - Free Report) and Arch Therapeutics, Inc. (ARTH - Free Report) delivered 340%, 89.96% and 100% positive surprise, respectively, in their last reported earnings.

Construction

All companies have reported and produced a blended beat ratio of 50%. Of this, earnings beat ratio is 85.7% while revenue beat ratio is 50%. The home-building sector has suffered a lot amid the COVID-19 lockdown, but is likely to see meaningful sales recovery ahead on low mortgage rates and a likely decline in prices.

Zacks Rank #2 Potlatch Corporation (PCH - Free Report) and Orion Group Holdings, Inc. (ORN - Free Report) delivered a respective 214.3% and 100% positive surprise in their last reported earnings.

Technology

As many as 91.3% companies of the sector have reported already and registered a blended beat ratio of 58.7%. There were 77.8% companies that beat on earnings and 65.1% that surpassed revenue estimates. The sector has been a true winner amid COVID-19 thanks to the rising work-and-learn-from-home trend.

Zacks Rank #2 Twilio Inc. (TWLO - Free Report) and Telenav Inc. delivered a respective 154.6% and 125% positive surprise in their last reported earnings.

Consumer Staples

About 90.6% companies of the sector reported and delivered a blended beat ratio of 55.2%. Within this cohort, 75.9% companies beat on earnings while 65.5% companies exceled on revenues. It is a non-cyclical sector and was less hammered by market doldrums. The sector emerged as a true safe haven amid the latest crisis as people on lockdown needed daily supplies.

Zacks Rank #2 Beyond Meat Inc. (BYND - Free Report) and Chewy Inc. (CHWY - Free Report) delivered 150% and 76.47% positive surprise, respectively, in the last reported earnings.

Industrials

All companies have reported and produced a blended beat ratio of 44.8%. Of this, earnings beat ratio is 75.9% while revenue beat ratio is 51.7%.  U.S. manufacturing activity recovered from an 11-year low in May, in a sign that the worst of COVID-19 economic crisis is probably over. Some of the industries were considered part of the critical workforce amid lockdown.

Zacks Rank #2 Axon Enterprise Inc and Century Aluminum Company (CENX - Free Report) respectively delivered 122.2% and 112.5% positive surprise in the last reported earnings.

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