My 3 Favorite Sectors for June
Hockey great Wayne Gretzky once said the key to his success was following the advice his father had given him:
“Skate to where the puck is going to be, not where it has been.”
Gretzky puts himself in the best position to score ahead of time.
Investing is much the same way.
It’s a game of expectations, and when reality exceeds market expectations that’s when you can earn big profits. It’s all about correctly anticipating and getting in position to score ahead of time.
There is no better example of this in investing than playing the earnings expectations game.
Spinning the Wheel on Earnings Expectations
Four times a year public companies report their sales and profit results to the world.
And in between those brief earnings reporting periods, Wall Street analysts play the game of managing expectations. They raise or lower estimates (mostly lower) for the S&P 500 companies in the months and weeks leading up to earnings reports, trying to get close to the mark.
Typically, earnings estimates drift down heading into reporting season and then companies beat estimates by a few cents per share.
Following the way S&P 500 estimates are trending and by how much can lead to profits when the Wall Street crowd gets too pessimistic.
Conversely, when analysts are too optimistic, this can also be a red flag for stocks, which brings us to the here and now.
As you can see in the chart above, earnings estimates (solid line) have dropped by about 2% over the past two months. And since the end of April, stock prices have followed estimates lower.
But the question is: How bad is a 2% drop in earnings expectations?
The answer? Not very.
This Is Where You Want Your Money Ahead of Q2 Earnings
Over the past 15 years (60 periods of quarterly earnings data), the average decline in S&P profit estimates during the first two months of a quarter has been 3.1%.
So in spite of rampant trade war fears and escalating tariffs, earnings estimate trends are holding up much better than average.
Basic Materials stocks, for example, have seen profit estimates slashed by 7.3%.
Industrial stocks fell by 6.9% over the past two months. That makes sense considering fears of a deepening trade slump. But if actual earnings for Q2 come in better than these dismal expectations, these two sectors could enjoy quite a bounce.
Another sector looks even more intriguing. That’s the S&P 500 Energy stocks. The stocks have cratered 13.5% since late April, yet earnings estimates have risen 7.7% over the past two months.
That could lead to some powerful positive surprises in the oil patch.
If you want to skate to where the profits are going ahead of the next round of earnings reports… consider parking some funds in Basic Materials, Industrials or Energy.
And in the coming issues I’ll share some of my favorite companies in each of these sectors.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch