The days when investors used to be happy with just earnings growth are long gone. Now, earnings improvement (no matter how big it is) seems inadequate for solid moves in the market. Today, it is the “BEAT” that matters the most.
After all, only earnings beat can give investors a clear picture of a company’s strength when an industry-wide earnings recession is felt. A 20% earnings rise (though it looks good apparently) doesn’t tell you if the growth momentum is decelerating.
On the other hand, analysts put together their insights and a company’s guidance when giving an earnings estimate. Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as market perception. So, historically, stocks of companies with solid quarterly earnings (on a nominal basis) fall if they miss or just come in line with market expectations.
How Have Beat Ratios Been in Q1 of 2017?
Talking of beat ratios, we would like to note that U.S. corporate earnings have advanced quite confidently in recent quarters. As per the Earnings Trends issued on May 5, 2017, as much as 82.4% of the S&P 500 members have already reported results. Of these, 73.3% beat on earnings in Q1 of 2017 while 67.7% surpassed revenue estimates, translating into a blended beat ratio of 52.9%.
This marked a considerable improvement from the past one year. If we look at this time around a year before, we will see that out of 87.2% of the S&P 500 companies that had reported, 71.3% came ahead of earnings estimates. About 56.4% topped revenue estimates for the quarter, resulting into a blended beat ratio of 46.6%, as per the Earnings Trends issued on May 6, 2016.
This clearly indicates that the U.S. corporate sector is on the right track. So, investors must be interested in finding out which sectors have solid blended beat ratios so far this season. Below we highlight those wining sectors so that investors can decide on their future plays.
Auto –First Trust NASDAQ Global Auto ETF CARZ
The full strength of the sector has reported already and produced a blended beat ratio of 80%. In the year-ago quarter, the figure was 40%. The pure-play global auto ETF CARZ was up 3.4% in the last one month (as of May 10, 2017) (read: Smooth Ride Ahead for Auto ETF?).
Industrial Products – Industrial Select Sector SPDR ETF (NYSE:XLI) XLI
As many as 90.9% companies of the sector has reported already and registered a blended beat ratio of 75% (up from 60% from what we saw in early May 2016). Several multi-sector conglomerates have their presence in the afore-mentioned ETF XLI.
So, we can take a look at the conglomerates’ blended beat ratio which came in at 83.3% -- the highest in the lot. XLI was up 2.4% in the last one month (as of May 10, 2017) (read: 4 Top Sector ETFs & Stocks to Outperform in Q1 Earnings).
Computer & Tech – SPDR FactSet Innovative Technology ETF XITK
About 71% companies of the sector delivered a blended beat ratio of 65.9%, which is higher than the year-ago level of 46.8%. In any case, the wind is in favor of technology investing right now, making XITK a winning proposition. XITK was up 9.1% in the last one month (as of May 10, 2017) (read: Profit from Cloud Computing Boom with This ETF).
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SPDR-INDU SELS (XLI): ETF Research Reports
SPDR-FS INV TEC (XITK): ETF Research Reports
FT-NDQ GL AUTO (CARZ): ETF Research Reports
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Zacks Investment Research