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Sector ETFs & Stocks to Tap Q2 Earnings Growth

The Q2 earnings season is underway with major banks set to report this week. Earnings for the S&P 500 index are expected to grow 5.7% from the same period last year on 4.6% higher revenues, as per the latest Earnings Trends. However, earnings and revenue growth estimates are lower than Q1 growth of 13.3% and 7%, respectively.

While earnings estimates for Q2 have declined from 7.9% at the start of the period, the magnitude of negative revision is lower relative to the recent quarters. Of the 16 Zacks sectors, 10 are likely to be contributors to earnings growth, with energy leading the way. The energy sector has the strongest growth of 247.7% for Q2, primarily reflecting easier comparisons. This was followed by 48.8% earnings growth for aerospace and double-digit growth each for construction, industrial products, and technology.  

Given this, we have highlighted one ETF and one stock from some of these sectors that could make great plays as the Q2 earnings season unfolds. Each of these ETFs and stocks have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). For stocks, we have added the extra flavor of a positive Earnings ESP. This is because stocks with this combination have a 70% chance of beating estimates when their earnings are released, and a VGM Style Score of B or better.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Energy

SPDR S&P Oil & Gas Exploration & Production ETF XOP: This fund provides equal weight exposure to 64 firms by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. Each holding makes up for less than 2.6% of the total assets. XOP is one of the largest and popular funds in the energy space with AUM of over $2.3 billion and expense ratio of 0.35%. It trades in heavy volume of around 16.7 million shares a day on average and has a Zacks ETF Rank of 3 with a High risk outlook (read: What Lies Ahead for Oil & Gas ETFs?).

Boardwalk Pipeline Partners LP BWP: This Zacks Rank #1 company is a master limited partnership that provides transportation, storage, gathering and processing services for natural gas and natural gas liquids. It has seen positive earnings estimate revision of a penny for the yet-to-be reported quarter over the past 90 days and has an expected growth rate of 10.90%. It has an Earnings ESP of +3.45% and delivered positive earnings surprises in the last four quarters, with an average beat of 17.31%. Boardwalk Pipeline Partners is scheduled to report its earnings results on August 7 and belongs to a strong Zacks Industry Rank in the top 43%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Construction

iShares U.S. Home Construction ETF ITB: This fund provides a pure play to home construction stocks by tracking the Dow Jones U.S. Select Home Construction Index. It holds a basket of 45 stocks with double-digit allocation going to the top two firms. Other firms hold not more than 8.8% of assets. The product has amassed $1.7 billion in its asset base and trades in heavy volume of around 2.7 million shares a day on average. It charges 44 bps in annual fees and has a Zacks ETF Rank of 1 with a High risk outlook (read: Top Sector ETFs of 1H).

Patrick Industries Inc. PATK: This Zacks Rank #1 company is a manufacturer and supplier of building products and materials to the manufactured housing and recreational vehicle industries. It has an Earnings ESP of +0.86% and delivered positive earnings surprise in the last quarter of 30.23%. The stock has seen positive earnings estimate revisions of a couple of cents over the past 90 days for the second quarter, representing earnings growth of 5.76%. The company is slated to release its earnings results on July 27 and belongs to a strong Zacks Industry Rank in the top 46%.

Industrials

First Trust Industrials/Producer Durables AlphaDEX Fund FXR: This fund follows the StrataQuant Industrials Index, which uses the AlphaDEX methodology to select stocks from the Russell 1000 Index and ranks them on both growth and value factors. The approach results in a basket of 93 securities, which are widely spread across components with none holding more than 1.93% of assets. In terms of industrial exposure, machinery takes the top spot with 21.2% share followed by 14.8% in airlines and 14% in aerospace & defense. The fund has accumulated nearly $1.8 billion in AUM and sees a good trading volume of about 280,000 shares a day. It charges 66 bps in fees per year and has a Zacks ETF Rank of 2 with a Medium risk outlook.

Graco Inc. GGG: This Zacks Rank #3 company supplies technology and expertise for the management of fluids in both industrial and commercial settings. It has an Earnings ESP of +3.77% and delivered positive earnings surprises in three of the last four quarters, with an average beat of 13.88%. The Zacks Consensus Estimate for the second quarter of 2017 is pegged at $1.06, up eight cents over the past three months, representing growth of 19.24%. The company is slated to release its earnings results on July 26 and belongs a solid Zacks Industry Rank in the top 22%.

Technology

First Trust NASDAQ-100-Technology Sector Index Fund QTEC: This ETF tracks the NASDAQ-100 Technology Sector Index, holding 34 stocks in its basket with almost equal allocation. From an industry look, semiconductors dominates the list with 42.1% share while software and internet have decent allocations of respectively 27.6% and 15.3%. QTEC is a large cap centric fund with AUM of $2 billion and average daily volume of around 228,000 shares. It charges 60 bps in annual fees and has a Zacks ETF Rank of 1 with a High risk outlook (read: Trump Slump to Oil Slide: Top ETF Stories of First-Half 2017).

Identiv Inc. INVE: This Zacks Rank #2 global security technology company provides trust solutions in the connected world, including premises, information and everyday items. It has an Earnings ESP of +23.08% and delivered an average positive earnings surprise of 51.41% in the last four quarters. The stock has seen no earnings estimate revisions over the past three months for the second quarter and has an expected earnings growth rate of 53.70%. The company has a solid Zacks Industry Rank in the top 24% and is slated to release earnings results on August 10.

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Boardwalk Pipeline Partners L.P. (BWP): Free Stock Analysis Report
 
Identiv, Inc. (INVE): Free Stock Analysis Report
 
ISHARS-US HO CO (ITB): ETF Research Reports
 
SPDR-SP O&G EXP (XOP): ETF Research Reports
 
FIRST N-100 TEC (QTEC): ETF Research Reports
 
FT-INDL/PROD (FXR): ETF Research Reports
 
Graco Inc. (GGG): Free Stock Analysis Report
 
Patrick Industries, Inc. (PATK): Free Stock Analysis Report
 
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