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5 Best Stocks to Buy Ahead of Q4 Earnings Season

Zacks

Market pundits have set their eyes on Corporate America as it is gearing up to report Q4 earnings results later this week. While the broader market is expected to face a period of consolidation, bank majors may feel the heat due to adjustments in values of deferred tax assets and liabilities and charges taken against earnings for repatriation.

The energy sector is poised to report highest earnings growth among all sectors, with technology, Industrial products and materials contributing the maximum. Thus, investing in fundamentally solid stocks from these sectors is a well thought-out strategy as these are likely to make the most of the Q4 earnings season. Here, we should bear in mind that better-than-expected earnings performances generally lead to a rally in the share price.


Market Consolidation on the Anvil

Of late, all major bourses have been hitting a series of record highs, with the S&P 500 crossing the coveted 2,700 mark for the first time this year. But, this uptrend may follow a fresh period of consolidation in the fourth-quarter earnings season.

And why not? In each of the first three quarters of 2017, the S&P 500 climbed around 5% heading into the earnings season. As the earnings seasons proceeded and companies started beating estimates, the market consolidated. Thus, a similar sort of market consolidation is expected this reporting cycle. After all, the index had already posted gains of 6.1% during the fourth quarter, which marked the ninth straight quarter of gains for the broader index.

S&P 500’s Pre-Earnings Price Performance

QuarterPrice Performance (Pre-Earnings Season)
Q1 20175.1%
Q2 20175.0%
Q3 20175.3%

(Source:CFRA)

Tax Overhaul Effects – Banks First On the Docket

The Q4 earnings results are expected to be quite disorderly, especially that of big banks. Lowering of the federal corporate tax rate from 35% to 21% will now force banking behemoths to re-measure the value of their deferred tax assets and liabilities. Moreover, one-time charges for repatriating overseas earnings need to be considered. Total Q4 earnings of major banks are expected to be down 6% from the same period last year on 5.3% higher revenues.

However, consumers are feeling pretty good about themselves, with their confidence index remaining at historically high levels. Their finances have improved based on household debt service payments, as a percentage of disposable income. This in turn reduces the loan default risks, which may bode well for banks. Further, it gives consumers provision to take more debt.

Needless to say, financial stocks have had a solid run over the last few months, buoyed by optimism surrounding the rise in interest rates. For the finance sector as a whole, total Q4 earnings results are expected to be up 3.1% from the same period last year (read more: Q4 Bank Earnings Will be Messy & Noisy).

Potential Gainers of Q4

The energy sector, in particular, is expected to record the strongest growth in the third quarter. Total earnings for the sector are expected to grow a whopping 176.3% on 23.7% higher revenues. The sector is benefitting from an uptick in oil and gas output to a revolution in the power mix to rise of electric vehicle. President Trump also continues to roll back regulations to boost oil production and save the coal industry.

Earnings at the technology sector are set to grow 14% on 8.5% higher revenues from the same period last year. Substantial growth in cloud computing, the Internet of Things and artificial intelligence are cited to be some of the reasons that have boosted the sector in recent times.

A steady rally among semiconductors also supported the broader tech sector at the beginning of this year, while the PHLX Semiconductor index gained nearly 40% last year. These makers of computer chips utilized in everything from smartphones to self-driving cars, in fact, recently got a boost from a survey by the Semiconductor Industry Association. The report showed that worldwide chip sales climbed 21.5% last November from a year earlier (read more: Tech Bigwigs Rise and Shine in 2018: 5 Must Buys).

Industrials sector, in the meanwhile, is expected to rise double digits. Increase in sales from housing demand post-hurricanes and a general uptick in the economy boosted manufacturing activities. High profits are expected from the materials segment as well. Overall Q4 earnings among all sectors are expected to be up 8.8% from the same period last year on 6.9% higher revenues. This would follow 6.7% earnings growth recorded in the third quarter of 2017 on 5.9% higher revenues.

The table below shows what is expected from the different sectors in Q4, compared with what was achieved in the preceding quarter.

(Source: Zacks Investment Research Inc.)

(Date as of: January 5, 2018)

5 Solid Choices

Given the aforesaid positives, investing in sound stocks from such winning sectors seems prudent. These stocks are expected to report a significant uptick in fourth-quarter earnings. They have a positive Earnings ESP — our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

These stocks also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.

Denbury Resources Inc. DNR operates as an independent oil and natural gas company in the United States. The company is expected to report earnings results for the quarter ending December 2017 on Feb 22. Denbury Resources has an Earnings ESP of +77.78%. The company, which is part of the Zacks Oil and Gas – Exploration and Production – United States industry, has a Zacks Rank #1 and a VGM Score of A.

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ProPetro Holding Corp. PUMP provides oilfield services. The company offers hydraulic fracturing and other complementary services. The company is expected to report earnings results for the quarter ending December 2017 on Feb 7. ProPetro Holding has an Earnings ESP of +13.39%. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

ProPetro Holding, which is part of the Zacks Oil and Gas – Field Services industry, has a Zacks Rank #1 and a VGM Score of A.

Texas Instruments Incorporated TXN designs, manufactures, and sells semiconductors to electronics designers and manufacturers worldwide. The company is expected to report earnings results for the quarter ending December 2017 on Jan 23. Texas Instruments has an Earnings ESP of +0.75%. The company, which is part of the Zacks Semiconductor – General industry, has a Zacks Rank #2 and a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.

Caterpillar Inc. CAT manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. The company is expected to report earnings results for the quarter ending December 2017 on Jan 25. Caterpillar has an Earnings ESP of +4.82%. The company, which is part of the Zacks Manufacturing – Construction and Mining industry, has a Zacks Rank #2 and a VGM Score of B (read more: Caterpillar at All-Time High, Spotlight on Industrial Stocks).

Huntsman Corporation HUN manufactures and sells differentiated organic and inorganic chemical products worldwide. The company is expected to report earnings results for the quarter ending December 2017 on Feb 21. Huntsman has an Earnings ESP of +1.04%. The company, which is part of the Zacks Chemical – Diversified industry, has a Zacks Rank #2 and a VGM Score of A.

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