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4 Sector ETFs & Stocks to Bet on Ahead of Q3 Earnings

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Third-quarter earnings will officially kick-start next week with a few major banks set to report results. Like the first half, the earnings picture looks soft this time, thanks to tough comparisons, moderating economic growth and the continuing trade dispute.

The S&P 500’s earnings are expected to decline 4.7% year over year despite 4.3% higher revenues. This would follow 0.4% growth in the second quarter and a flat showing in the first quarter. Earnings growth is expected to be negative for 11 of the 16 Zacks sectors, with energy and basic materials being the biggest drags (read: Chances of Fed Rate Cut in October Rise: Sector ETFs to Buy).

Given the dismal picture, investors could place their bet on sectors that are expected to post earnings growth. Business Services is expected to record strong earnings growth of 7%, followed by transportation (6%), utilities (3.4%), construction (1.6%) and financials (1.3%).

Given this, we have highlighted one ETF and one stock from some of these sectors that could make great plays as the earnings season unfolds. These ETFs and stocks have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). For stocks, we have added the extra criteria of a VGM Score of B or better and a positive Earnings ESP. Stocks with a Zacks Rank #3 or better and a positive ESP have 70% chance of beating estimates.

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

Transportation

U.S. Global Jets ETF (JETS - Free Report) :
This fund provides exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. In total, the product holds 34 securities that are heavily concentrated on the top four firms. The fund has gathered $48.5 million in its asset base, while seeing a moderate trading volume of nearly 27,000 shares a day. It charges investors 60 basis points (bps) in annual fees and has a Zacks ETF Rank #3 with a High risk outlook (read: Saudi Oil Attack: Sector ETF Winners and Losers).

Allegiant Travel Company (ALGT - Free Report) : This is a low-cost airline that operates a passenger airline marketed to leisure travelers in small cities. The stock has a Zacks Rank #2 and an Earnings ESP of +6.14%. The Zacks Consensus Estimate for the to-be-reported quarter has been revised upward by 25 cents over the past three months and its earnings are estimated to grow 137.23%. However, the stock delivered negative average earnings surprise of 2.43% in the last four quarters. The company is slated to release earnings results on Oct 23.

Utilities

Utilities Select Sector SPDR (XLU - Free Report) : With AUM of $11.4 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. Electric utilities take the top spot in terms of sectors at 61.2%, closely followed by multi utilities (32.4%). The product charges 13 bps in annual fees and sees heavy volume of around 17.3 million shares on average. It has a Zacks ETF Rank #3 with a Medium risk outlook (read: Chances of Fed Rate Cut in October Rise: Sector ETFs to Buy).

Telephone and Data Systems Inc. (TDS - Free Report) : It provides wireless; cable and wireline broadband, TV and voice; and hosted and managed services connections nationwide through its businesses — U.S. Cellular, TDS Telecom, OneNeck IT Solutions and BendBroadband. It has a Zacks Rank #2 and an Earnings ESP of +54.84%. The stock saw negative earnings estimate revision of five cents for the to-be-reported quarter over the past three months and has an expected decline rate of 42.5%. It delivered a trailing four-quarter average positive earnings surprise of 18.47%. The company is slated to release earnings results on Nov 1.

Construction

SPDR S&P Homebuilders ETF (XHB - Free Report) : The most popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. The fund holds about 35 securities in its basket with equal-weighted exposure of around 5%. It has AUM of $666.7 million and trades in volume of almost 2.1 million shares. The fund charges 35 bps in annual fees and carries a Zacks ETF Rank #3 with a High risk outlook (read: 4 Market-Beating Sector ETFs of the Third Quarter).

Meritage Corporation (MTH - Free Report) : This company designs and builds single-family homes in the United States. The stock has a Zacks Rank #1 and an Earnings ESP of +2.03%. The Zacks Consensus Estimate for the to-be-reported quarter has been revised upward by 17 cents over the past 90 days and represents a modest 11.28% earnings growth. Additionally, the company delivered positive earnings surprise of 13.48% over the past four quarters and is scheduled to report earnings on Oct 22. You can see the complete list of today’s Zacks #1 Rank stocks here.

Financials

Financial Select Sector SPDR Fund (XLF - Free Report) : This fund follows the Financial Select Sector Index and holds 67 stocks in its basket. Banks dominate the fund’s portfolio with 42.1% while capital markets, insurance and diversified financial services round off the next three spots. The fund has accumulated nearly $22.4 billion in AUM and charges investors 13 bps in annual fees. It trades in volumes of 50.1 million shares on average per day and has a Zacks ETF Rank #2 with a Medium risk outlook (read: Guide to 10 Most-Heavily Traded ETFs).

The Progressive Corporation (PGR - Free Report) : Through its subsidiaries, the company provides personal and commercial property-casualty insurance, and other specialty property-casualty insurance and related services primarily in the United States. The stock has a Zacks Rank #2 and an Earnings ESP of +0.89%. It saw positive earnings estimate revision of 3 cents over the past 90 days for the to-be-reported quarter and has an estimated year-over-year growth rate of 12.81%. The company delivered a positive earnings surprise of 7.49% in the past four quarters. It is slated to release earnings on Oct 15.

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