Healthcare ETFs: Gain Or Pain Ahead In Q3 Earnings?

The Q3 earnings season is in full swing with the healthcare sector showing the third highest growth at this stage, trailing materials and business services. Earnings from 22% of the sector’s market capitalization that have reported so far are up 15.9% with a beat ratio of 83.3% on revenue growth of 8.8% and revenue surprise of 66.7%, as per the Earnings Trends.

In particular, robust earnings reports from the leading drug maker Johnson & Johnson (NYSE:JNJ) and the largest U.S. health insurer UnitedHealth Group (NYSE:UNH) spread strong optimism in the sector last week (J&J Beats on Q3 Earnings: Should You Buy Healthcare ETFs?).

As a result, healthcare ETFs saw smooth trading, with the popular funds – Health Care Select Sector SPDR Fund XLV, Vanguard Health Care ETF VHT, iShares U.S. Healthcare ETF IYH and Fidelity MSCI Health Care Index ETF FHLC – gaining nearly 0.2% over the past five days. Will the positive trend continue in the weeks ahead given that the sector is expected to post Q3 earnings growth of 3.7% and revenue growth of 7.4%?

Let’s delve into the earnings picture of some of the other largest companies in the healthcare space that would drive the performance of the above-mentioned funds in the coming days. Some of the big names include Pfizer (NYSE:PFE) , Merck (NYSE:MRK) , Amgen (NASDAQ:AMGN) , AbbVie (NYSE:ABBV) , Gilead Sciences (NASDAQ:GILD) and Bristol-Myers Squibb Company (NYSE:BMY) that dominate these fund’s portfolio. All these stocks collectively account for the maximum portion, with 28.6% share in XLV, 27.4% in IYH, 25% in VHT and 24.6% in FHLC.

Inside Our Surprise Prediction of These Stocks

Pfizer has a Zacks Rank #3 (Hold) and an Earnings ESP of -1.59%, indicating a lower probability of beating estimates this quarter. According to the our surprise prediction methodology, a Zacks Rank #1 (Strong Buy), #2 or #3 when combined with a positive Earnings ESP has chances of an earnings beat, while a Zacks Rank #4 or #5 (Sell rated) are best avoided. Pfizer delivered positive earnings surprises in the last four quarters, with an average beat of 11.16%.

Additionally, the Zacks Consensus Estimate for third-quarter 2016 is 63 cents, up a penny over the past three months. Further, the stock has a solid Value and Momentum Style Score of B and A, respectively, while a Growth Style Score of C looks unimpressive. Pfizer is scheduled to report its earnings on November 1 before the opening bell.

Merck is expected to report its results on October 25 before market open. It has a Zacks Rank #2 (Buy) and an Earnings ESP of 0.00%, which makes surprise prediction difficult. The stock saw no earnings estimate revision over the past 90 days for the to-be-reported quarter. The drug maker delivered positive earnings surprises in the last four quarters, with an average beat of 3.37%. The stock has an unfavorable Value and Growth Style Score of C and D, respectively, while a Momentum Style Score of B looks good (read: 5 ETFs to Buy as Election Uncertainty Looms).

Amgen has a Zacks Rank #3 and an Earnings ESP of +1.08%, indicating a good chance of beating estimates this quarter. The earnings surprise track over the past four quarters is robust with an average positive surprise of 11.55%. The stock also witnessed positive earnings estimate revision of a penny over the past 90 days for the yet-to-be-reported quarter. Additionally, the stock has a solid Value Style Score of B but an unfavorable Growth and Momentum Style Score of C and D, respectively. Amgen will reports its earnings on October 27 after market close.

AbbVie has a Zacks Rank #3 and an Earnings ESP of +0.83%, indicating a reasonable chance of beating estimates this quarter. The company delivered positive earnings surprises in the last four quarters, with an average beat of 3.32%. Moreover, it saw solid positive earnings estimate revision of three cents over the past three months for the to-be-reported quarter. Further, the stock has a top Momentum Style Score of A and a Value Style Score of B while the Growth Style Score is unimpressive at C. The company is schedule to report on October 28 before market open.

Gilead is expected to release its earnings on November 1 after market close. It has a Zacks Rank #5 (Strong Sell) and an Earnings ESP of -0.36%. Gilead saw a negative earnings estimate revision of 19 cents over the past three months for the to-be-reported quarter but delivered positive earnings surprises in three of the last four quarters, with an average beat of 4.08%. Though it has a solid Value and Growth Style Score of B each, the Momentum Style Score of F is an eyesore (read: Prepare for a Clinton Presidency with These Stocks & ETFs).

Bristol-Myers will likely report its earnings on October 27 before the opening bell. It has an unfavorable Zacks Rank #4 but an Earnings ESP of +3.08%. The stock delivered positive earnings surprises over the past four quarters with an average beat of 15.56% and saw positive earnings estimate revision of a penny for the to-be-reported quarter. However, it has an unfavorable Value, Growth and Momentum Style Score of C, F and C, respectively.

Summing Up

Given that some companies have an unfavorable Zacks Rank and a lower probability of beating this quarter, healthcare ETFs might struggle to hold onto gains in the coming days. However, the above-mention ETFs have a favorable Zacks ETF Rank of #1 (Strong Buy) in case of XLV, VHT and IYH and #2 for FHLC (see: all the Healthcare ETFs here).

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>


BRISTOL-MYERS (BMY): Free Stock Analysis Report

PFIZER INC (PFE): Free Stock Analysis Report

JOHNSON & JOHNS (JNJ): Free Stock Analysis Report

MERCK & CO INC (MRK): Free Stock Analysis Report

GILEAD SCIENCES (GILD): Free Stock Analysis Report

AMGEN INC (AMGN): Free Stock Analysis Report

UNITEDHEALTH GP (UNH): Free Stock Analysis Report

ABBVIE INC (ABBV): Free Stock Analysis Report

SPDR-HLTH CR (XLV): ETF Research Reports

VIPERS-HLTH CR (VHT): ETF Research Reports

ISHARS-US HLTHC (IYH): ETF Research Reports

FID-H CARE (FHLC): ETF Research Reports

Original post