Every three months, analysts, speculators and investors eagerly await quarterly earnings releases. For some public companies, these results can quickly become make-or-break omens. Today we’ll look at 3 stocks that look like clear winners to buy for earnings.
The health and economic effects of the pandemic have depressed earnings for many companies when compared to the numbers from a year ago. However, there are also plenty of firms whose results show year-over-year (YoY) revenue and profit increases. Thus, it is hard to generalize how earnings will come in for most companies in the rest of the year.
Investors have been rallying around businesses likely to benefit from the current “stay-at-home, work-from-home” trend. Meanwhile, a large number of companies have been tightening their belts as revenue and profit growth has slowed down. But it isn’t easy to forecast how that may play out over the coming months.
Recent research by Juhani T. Linnainmaa and Conson Y. Zhang of the University of Southern California highlights:
“Stock prices tend to move in the direction of recent earnings surprises and returns are higher when firms report earnings than when they do not… Investors start out being overly optimistic, but as new information arrives and uncertainty gets resolved, they correct their biases.”
With all that information, here are three stocks to buy for earnings:
- Financial Select Sector SPDR Fund (NYSE:XLF)
- Home Depot (NYSE:HD)
- Principal Healthcare Innovators Index ETF (NASDAQ:BTEC)
Despite the volatility around earnings announcements, fundamental metrics matter the most over the long run. Therefore, investors should ideally buy robust companies that have earnings growth, stable cash flows and proactive management and that are innovative.
Stocks To Buy For Earnings: Financial Select Sector SPDR Fund (XLF)
52-week range: $17.49 – $31.38
Dividend yield: 2.97%
Expense ratio: 0.13%
In the U.S., earnings season typically kicks off with numbers from several of the largest global banks. Earlier in the month, metrics from Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), JPMorgan Chase (NYSE:JPM) and Morgan Stanley (NYSE:MS) highlighted strength in both capital markets and trading. These banks’ fixed income and asset management departments did particularly well. On the other hand, (NYSE:) earnings were disappointing. Given historically low interest rates, the bank’s interest income was negatively affected.
Our first discussion centers around an exchange-traded fund (ETF) in financial services, namely the Financial Select Sector SPDR Fund, which provides exposure to a range of financial firms in the S&P 500 index.
XLF, which was started in 1998 and has 65 holdings, tracks the Financials Sector Index. Top ten businesses make up over half of net assets, which stand at $18.5 billion. Berkshire Hathaway (NYSE:BRK.B), JPMorgan Chase, and Bank of America (NYSE:BAC) head the list.
Since the start of the year, XLF is down about 19%. Trailing P/E and P/B ratios of 15.53 and 1.59, respectively, could put the fund on the radar for value investors. We’d recommend investors buy the dips.
Home Depot (HD)
52-week range: $140.63 – $292.95
Dividend yield: 2.13%
Atlanta, Georgia-based Home Depot is the world’s largest home improvement retailer. The group operates about 2,300 warehouse-type stores throughout the U.S., as well as in Puerto Rico, the U.S. Virgin Islands, Guam, Canada and Mexico. And since HD is a member of the Dow Jones Industrial Average, the Street pays special attention to its earnings.
On August 18, the company announced Q2 2020 results. Sales of $38.1 billion were a 23.4% increase YoY, while net earnings of $4.3 billion translated into $4.02 per diluted share. A year ago, those metrics were $3.5 billion in net earnings, $3.17 per diluted share.
In previous quarters, management has spent heavily to integrate its physical and online businesses. The group is in the middle of a three-year, $11 billion investment program. And the pandemic only reaffirmed, for both the company and investors, how important its e-commerce operations are becoming.
Plus, as an essential retailer, HD stores have remained open during the lockdown weeks earlier in the year. Of course, millions of customers have also shopped online.
CEO Craig Menear said, “The investments we have made across the business have significantly increased our agility, allowing us to respond quickly to changes while continuing to promote a safe operating environment.”
Year-to-date, HD stock is up over 28%. Its forward P/E and P/S ratios stand at 23.92 and 2.55, respectively. The company is expected to report earnings next on November 17. As a result, between now and then, there is likely to be increased volatility in the shares.
A potential profit-taking could push Home Depot stock toward the $270-level, which would mean a better entry point for investors looking to buy into this retail giant.
Principal Healthcare Innovators Index ETF (BTEC)
52-week range: $125.34 – $52.50
Dividend yield: N/A
Expense ratio: 0.42%
The Covid-19 pandemic has put many biopharma stocks in the limelight. A number of companies that were virtually unknown at the start of the year have since splashed into the headlines through their efforts to find a cure for the novel coronavirus.
Seasoned investors will realize that biotech and healthcare stocks tend to be extremely volatile, especially around earnings dates. Yes, they have the potential to make their shareholders very wealthy. But conversely disappointing announcements about clinical trials or upcoming drugs can really sink a given stock and wipe off a considerable amount of wealth. As a result, a number of market participants prefer to invest in biotech stocks using ETFs.
Our second fund for today is the Principal Healthcare Innovators Index ETF, which focuses on smaller, yet innovative companies that might initially get overlooked by the market. Fund managers focus on companies invested in early-stage research and development (R&D). Holdings are balanced twice a year, in April and October.
BTEC currently has 202 holdings. The top ten firms comprise around 30% of the fund. Moderna (NASDAQ:MRNA), Seagen (NASDAQ:SGEN), Exact Sciences (NASDAQ:EXAS), and Teladoc Health (NYSE:TDOC) head the list.
So far in 2020, BTEC is up about 30%. We believe the new decade will see significant positive developments in biotech and healthcare sectors. Therefore, investors with long-term horizons may consider researching the fund further.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.