Invest in These Sector ETFs

The coronavirus outbreak is expected to take a stronger beating on second-quarter earnings. This is especially true as S&P 500 earnings are expected to decline 44.1% on 10.9% lower revenues. The earnings projection is down from around 17.5% earnings decline expected in early April.

Earnings growth is expected to be negative for 15 of the 16 Zacks sectors with double-digit declines. The four sectors that are expected to lose money in Q2 (year-over-year declines of 100% or more) are autos (226.1% earnings decline), transportation (151.2%), energy (139.4%), and consumer discretionary (109.1%). Utilities is the only sector with a modest 0.9% earnings growth expectation relative to the year-ago period.

According to the FactSet, second-quarter S&P 500 earnings are expected to decline by 43.5% — the largest year-over-year drop since Q4 2008 — with revenues falling by 11.5% (read: 5 ETF Ideas for a Winning Portfolio in the Second Half).

Given the dismal picture, investors could place their bet on sectors that have shown strength amid the coronavirus pandemic. 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.

Technology

Though the sector’s earnings are expected to decline 13.5% year over year, its resilience is expected to recoup those declines very quickly. Five S&P 500 companies — Amazon AMZN, Alphabet GOOGL, Microsoft MSFT, Facebook FB and Apple AAPL — now account for 22.5% of the index’s total market capitalization (read: Big Tech Stocks Top Trillion-Dollar Each: ETFs to Bet On).

Technology Select Sector SPDR Fund XLK: This ETF tracks the Technology Select Sector Index, holding 71 stocks in its basket. Software takes the largest share at 34.5% of assets while technology hardware storage & peripherals, IT services and semiconductors & semiconductor equipment round off the next three with double-digit exposure each. XLK is the most-popular technology ETF with AUM of $32.6 billion and average daily volume of 16.8 million shares. The fund charges 13 bps in annual fees and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

SAP SE SAP: This company is one of the largest independent software vendors in the world and the leading provider of enterprise resource planning or ERP software. It has a Zacks Rank #2 and an Earnings ESP of +17.56%. It saw positive earnings estimate revision of 5 cents over the past 30 days for the to-be-reported quarter. The company’s trailing four-quarter earnings surprise is 0.02%, on average. It is slated to release earnings on Jul 27.

Medical

This sector’s earnings are expected to decline 18.1% year over year but revenues are higher at 0.3%. The COVID-19 pandemic has kept biotech players all over the world on their toes for a vaccine or a treatment. This new opportunity has made the sector the most attractive to investors (read: Biotech ETFs to Gain as Coronavirus Vaccine Hopes Strengthen).

iShares U.S. Healthcare ETF IYH: This fund, which  holds 122 stocks, offers exposure to U.S. healthcare equipment and services, pharmaceuticals and biotechnology companies by tracking the Dow Jones U.S. Health Care Index. In terms of industrial exposure, pharma takes the top spot at 28%, followed by health care equipment (23.5%) and biotech (19.7%). The product has amassed nearly $2.4 billion in its asset base, while charging 43 bps in annual fees. It trades in good volume of around 103,000 shares a day and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

Molina Healthcare Inc MOH: It is a multi-state managed care organization participating exclusively in government-sponsored healthcare programs such as the Medicaid program and the State Children’s Health Insurance Program, catering to low-income persons. The stock has a Zacks Rank #2 and an Earnings ESP of +35.91%. The Zacks Consensus Estimate for the to-be-reported quarter has been revised upward by 50 cents over the past month and represents year-over-year growth of 35.4%. The company’s trailing four-quarter positive earnings surprise is 7.17%, on average. The company is slated to release earnings results on Jul 30 (read: 3 Hot Sector ETFs to Tide Over the Coronavirus Crisis in Q3).

Utilities

Earnings and revenues of the Utilities sector are expected to grow 0.9% and 0.8%, respectively.

Utilities Select Sector SPDR XLU: With AUM of $11.3 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 62.7%, closely followed by multi utilities (31.6%). The product charges 13 bps in annual fees and sees heavy volume of around 20.7 million shares on average. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Pinnacle West Capital Corporation PNW: This company is involved in the generation, transmission and distribution of electricity from coal, nuclear, gas, oil and solar. It has a Zacks Rank #3 and an Earnings ESP of +1.77%. The stock saw negative earnings estimate revision of 18 cents for the to-be-reported quarter over the past month. However, it has an expected earnings growth rate of 3.1%. Its trailing four-quarter earnings surprise is 17.74%, on average. The company is slated to release earnings results on Aug. 6.

Construction

This sector is expected to witness earnings and revenue decline of 16.6% and 0.9%, respectively. However, the housing industry seems unscathed by the COVID-19 pandemic as demand for homes is surging thanks to lower mortgage rates and home price. With the economy reopening, demand is poised to go even higher, resulting in skyrocketing prices of homebuilders.

SPDR S&P Homebuilders ETF XHB: The most-popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. The fund holds about 35 securities in its basket. It has AUM of $810.6 million and trades in volume of almost 2.5 million shares. The fund charges 35 bps in annual fees and carries a Zacks ETF Rank #3 with a High risk outlook.

Meritage Homes Corporation MTH: It is one of the leading designers and builders of single-family homes. The stock has a Zacks Rank #1 (Strong Buy) and an Earnings ESP of +7.42%. The Zacks Consensus Estimate for the to-be-reported quarter has been revised upward by 15 cents over the past 30 days and has expected 13% earnings growth. Additionally, the company delivered a positive four-quarter earnings surprise of 32.64%, on average, and is scheduled to report earnings on Jul 22. You can see the complete list of today’s Zacks #1 Rank stocks here.

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