We’re in the thick of earnings season, and so far company reports have been strong.
Corporate profits are booming, with research firm FactSet plotting a blended earnings growth rate of about 20% for the S&P 500 Index SPX, +0.40% Furthermore, more than one in five companies in the index issued positive guidance for second-quarter results going into this reporting season, which is the highest share since 2006.
Of course, these favorable trends beg an important question: If earnings are so strong, why haven’t the major indexes like the S&P 500 been able to reclaim the highs set in January?
Uncertainty over trade policies is surely some of it, as is broader concern about valuations, as this bull market plods along well into its ninth year.
But a closer look shows that while the indexes have been choppy, there are plenty of individual stocks making big moves — both to the upside and to the downside — in 2018.
To make the most of this high-octane earnings season, then, investors should be more discerning than just camping out in an index fund that gives you nearly equal shares of winners and losers.
Instead, a more tailored approach could pay off in a big way by tapping into the very best stocks, and avoiding the rest.
Here are seven sectors that are likely to make waves this earnings season, with a stock to buy and stock to sell in each.
Big Tech — Buy Microsoft, Not IBM
Microsoft MSFT, +0.99% reports earnings later this week, on July 19. And if the past is any indication, the company will once again prove that it is successfully making the transition to a cloud-computing giant with a stable stream of enterprise revenue. Shares have been trading around record highs after an impressive report in April, and investors should expect another strong showing in a few days.
Of course, that growth isn’t shared among all Big Tech stocks. IBM IBM, -1.35% has declined about 5% in 2018, in large part because of a big move down in mid-April after first-quarter earnings. Yes, IBM showed decent growth at the time, but it also gave investors a glimpse of a disappointing future, owing to narrowing margins and one-time benefits that spackled over challenges. Those troubles are likely to come home to roost again in the second quarter, as IBM will report again on July 18.
Big Banks — Buy Bank of America, Not Wells Fargo
Bank earnings this week seemed strong across the board. But Bank of America BAC, +0.77% stood out from the pack with strong results that sent the shares up about 5% in two sessions after its Monday report; profits and revenue topped expectations handily.
However, while corporate tax cuts and the prospect of higher interest rates lifted the financial sector as a whole, don’t be fooled into thinking that the big banks are all created equal. While Wells Fargo WFC, -0.75% rallied with its peers, shares were stuck in a rut leading up to this week, in part, because of the bank’s recent history of disappointing results — to say nothing of recent scandals that have damaged its brand.
Wells may have had a decent run over the past few days, but is up only 4% in the past 12 months vs. more than 20% for Bank of America stock. Don’t fall for the generic headlines, and put your money behind a better bank.
Payment Technology — Buy Visa, Not American Express
Beyond big banks, financial-services firms should also post strong numbers as a group — and you can count on Visa V, +0.85% to be at the head of the pack when it reports next week, on July 25. Despite a share price that has soared over 750% in the past decade since its IPO, Visa continues to deliver, thanks to impressive growth; the company is expecting another quarter of double-digit revenue expansion and earnings per share that will be up over 25% year-over-year.
American Express AXP, +0.46% is still very much in growth mode, too. However, as Visa continues to expand into mobile-payments technology, there is a real risk that AmEx will be left behind. This brand isn’t going anywhere with its high-end customer base and great brand, but there’s a reason AmEx’s stock is basically flat since its January highs while Visa is up an impressive 20% this year.
Streaming Video — Buy Bilibili, Not Netflix
In case you’ve been living under a rock, Netflix NFLX, +0.53% crashed and burned this week after failing to live up to expectations of subscriber growth. Sure, the stock has almost doubled this year, but momentum stocks like this can cause a lot of pain when they roll over — as Netflix seems to be doing.
It may be hard not to hang on to Netflix if your cost basis is down under $100 a share. But for new money, it’s safer to steer clear of this volatile stock right now. Instead, consider Chinese streaming video play Bilibili Inc. BILI, +0.80% This fast-growing company doesn’t report earnings until August, but you won’t want to wait to get on board; shares are already up 20% from their spring IPO. The platform has more than 77 million visitors, and is growing at a roughly 35% clip — with more than eight in 10 users under age 18! If you really want to play international streaming, look at this Asian player over Netflix, particularly after the recent fireworks.
Restaurants — Buy Chipotle, Not Starbucks
A few years ago, if you mentioned you were going to sell your shares of Starbucks SBUX, +0.67% and buy Chipotle CMG, +0.11% you would have been laughed out of the room. Shares of Chipotle were in free-fall in late 2015 and 2016 amid food-safety concerns, while Starbucks could seemingly do no wrong.
But while Chipotle certainly isn’t perfect, the company has rebounded dramatically from lows at the end of 2017, thanks to a surge of more than 20% after a first-quarter earnings beat in April. We could see another strong showing next week, on July 26, as expectations remain muted. Meanwhile, Starbucks has been struggling since its 2017 highs, and the departure of iconic exec Howard Schultz has left investors worried about the future. It also reports July 26, and after trouble in April around its first-quarter report, things are not looking up.
Starbucks isn’t going anywhere and Chipotle isn’t out of the woods, but it’s clear which stock has the wind at its back this earnings season.
Retailers — Buy Macy’s, Not L Brands
The age of e-commerce has not been easy for traditional retailers. But after some growing pains, department store Macy’s M, +0.22% seems to be getting its act together lately. Shares have moved in almost a straight line higher since October, giving Macy’s stock a 12-month return of more than 60% owing to a blowout earnings report in May that included a big boost to forward guidance. That hints at another strong report in August.
The story could not be more different for Victoria’s Secret operator L Brands LB, +0.12% however. L Brands stock is down by double-digits in 2018 as anemic revenue growth continues to squeeze the company. Worse, the company slashed its outlook in May, a sure sign of continued trouble to come for this retailer.
Health Care — Buy Align, Not J&J
While mega-cap health-care company Johnson & Johnson JNJ, +3.54% and mid-sized dental-products player Align Technologies ALGN, +2.28% are not exactly peers, it’s important to note how they exemplify different approaches to health-care investing — and one that is particularly noteworthy this earnings season.
On one hand, you have a diversified but lumbering behemoth in J&J. Shares are down 10% so far this year, and while it beat on revenue and profits on Tuesday, it didn’t show any growth potential to investors. Still, the stock was up Tuesday.
Contrast that with Align, which reports next week, on July 25. The company is projecting more than 30% revenue growth this year, and earnings that will be up almost as much. In January, Align broke out immediately after impressive results. And while it simply held the line in its April report, shares have rallied strongly in anticipation of the growth it will show this July report.
There’s a reason why J&J is in the red while Align has more than doubled in the last year. That reason is growth, and investors should chase it here and in all of their health-care investments this earnings season vs. the stagnant mega-caps with little upside.