Though the U.S. equity benchmarks have hit multiple highs on several occasions this year, concerns have started to build up in the last few weeks. Global growth worries, uncertain Fed policy and strong dollar have put immense pressure on stock market performance. The conflict in Ukraine, Iraq instability, a protest in Hong Kong and Ebola crisis in West Africa also added to the woes.
All these have spread overall market uncertainty and threatened weak corporate earnings growth. This is especially true as Q3 earnings for the S&P 500 companies are expected to grow only 1.6% on an annual basis on 1.7% higher revenues. Earnings estimates have fallen sharply over the past three months from 6.3% growth projected in late June.
Further, the estimates are well below Q2 earnings growth of 8.1%. The weakness is broad-based with 15 out of 16 Zacks sectors witnessing slower growth from the prior-quarter earnings. Only the basic materials sector is expected to post growth of 10.2% in Q3, up from 8.6% in Q2 as per the Zacks Industry Trend.
This is because a rise in U.S. industrial activity, turnaround in metals and mining stocks, urbanization in Asia, and increasing demand in developed countries will likely propel the sector’s earnings higher. As such, it would be a great idea to zero in on the products of the materials sector, which is not only poised to post solid earnings growth but is also expected to be the top performer just behind construction this earnings season.
Below, we have highlighted two ETFs and stocks that may be better picks given their favorable Zacks Ranks of 3 or ‘Hold’ rating. These are expected to outperform the overall market in the coming weeks as earnings season unfolds:
ETF Picks
Materials Select Sector SPDR (ARCA:XLB)
The most popular materials’ ETF on the market, XLB, follows the S&P Materials Select Sector Index. In total, the fund holds about 30 securities in its basket with the largest allocation going to DuPont (NYSE:DD), Monsanto (NYSE:MON) and Dow Chemical (Dow 30). The three firms collectively make up for 30.14% of total assets.
In terms of industrial exposure, chemicals dominates about three-fourths of the portfolio while metals & mining and containers & packaging round off the top three. The fund manages about $4.8 billion in its asset base and trades in heavy volume of nearly 4.8 million shares. The ETF charges 16 bps in fees per year from investors and has added 1.5% in the year-to-date time frame.
iShares U.S. Basic Materials ETF (NYSE:IYM)
This ETF tracks the Dow Jones U.S. Basic Materials Index and holds 59 stocks in its basket. Here again, the top three holdings – DD, MON and DOW – dominate the fund’s return with a combined 27.3% share in the basket. Other firms do not hold more than 6.5% of assets. The product is heavily skewed toward the chemical segment, as these make up for three-fourths of the portfolio. Industrial metals & mining, mining, and forestry & paper take the remaining portion in the basket.
The fund has amassed $782.5 million in its asset base and charges 43 bps in fees and expense. Volume is moderate as it exchanges around 270,000 shares in hand a day. The ETF has lost about 1% so far this year.
Stock Picks
Goldcorp (NYSE:GG)
The company has an Earnings ESP of +15.79%. The Zacks Consensus Estimate for the third quarter 2014 is 19 cents, up by a penny over the last 30 days and couple of cents over the last 90 days. The company delivered positive earnings surprises in the last four quarters, with an average beat of 32.63%.
Based in Vancouver, Canada, Goldcorp is a leading gold producer engaged in gold mining and related activities including exploration, extraction, processing and reclamation in Canada, the United States, Mexico, and Central and South America.
Goldcorp is scheduled to report its results before the opening bell on October 30.
AK Steel Holdings (NYSE:AKS)
AK Steel has an Earnings ESP of +11.11% and the Zacks Consensus Estimate of 9 cents for the third quarter. The magnitude of earnings revision has gone up by a penny over the past one-month. AKS also delivered average positive earnings surprises of 71.75% in the last four quarters.
Based in West Chester, Ohio, AK Steel is a leading producer of flat-rolled carbon, stainless, electrical steel products, and stainless tubular steel products that are used in automotive, appliance, construction and manufacturing markets.
The company is slated to release its earnings before the opening bell on November 4.