Where To Invest For Peak Earnings

Welcome to Episode #129 of the Zacks Market Edge Podcast.

Every week, host and Zacks stock strategist, Tracey Ryniec, will be joined by guests to discuss the hottest investing topics in stocks, bonds and ETFs and how it impacts your life.

In this episode, Tracey is joined by Sheraz Mian, Zacks Director of Research, to discuss the fantastic first quarter earnings season and the possibility of peak earnings.

First Quarter Earnings are Fantastic

Earnings are turning out as everyone expected: great.

Earnings are expected to rise 22.8% in the first quarter, up from a 13.4% gain in the fourth quarter of 2017.

They’re also expected to be up by more than double digits in every remaining quarter of 2018.

This has many worried about “peak” earnings and that this is the best that companies will be able to do.

Is it peak earnings?

And how should you invest if it is?

Evolution of Q1 and Q2 Growth Estimates

Months ago, it became obvious that the first quarter earnings season was going to be phenomenal because the first quarter growth estimates were soaring.

But what about the second quarter?

While earnings are expected to rise 17.9% in Q2, the evolution has been flat. There hasn’t been a rise in expectations since March.

That means we’re not seeing as many surprise beats and raises. The strong earnings growth is already priced in.

If This is Peak Earnings, Where Should You Invest?

Two sectors are seeing strong earnings and revenue growth in the first quarter: finance and energy.

Here are some finance favorites:

1. PacWest Bancorp (NASDAQ:PACW) is a big California regional bank. It just raised its dividend, which now yields 4.6%. It’s a Zacks Rank #1 (Strong Buy).

2. WesBanco (NASDAQ:WSBC) is a West Virginia regional bank which recently announced it was buying Farmers Capital Corporation for $378 million. Combined with other acquisitions, that buy should push it towards $12 billion in assets by the end of next year.

3. Comerica (NYSE:CMA) is a Texas regional bank with a forward P/E of 14. It pays a dividend yielding 1.3%. Earnings are expected to rise 40% in 2018. It’s also a Zacks Rank #1 (Strong Buy).

4. JPMorgan Chase (NYSE:JPM) is in the Value Investor portfolio. It’s expected to grow earnings by 30% in 2018. This large cap bank pays a dividend that yields 2.1%.

5. Wells Fargo & Company (NYSE:WFC) is the black sheep of the big banks. Shares are down nearly 14% year-to-date. But it’s also the cheapest of the big banks with a forward P/E of just 11.4. It also pays a dividend, currently yielding a healthy 3%.

The energy sector also appears to be under valued compared to others. If oil prices rise into the $70 - $80 range, there could be an even bigger earnings growth upside.

What else should investors know about peak earnings and where to look for investing ideas?

Find out on this week’s podcast.

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