Lockdown impositions across the world, in a bid to curb the spread of COVID-19, have been taking a toll on the economy. The pandemic has caused disruptions in major sectors and economic zones, resulting in a full-blown global crisis due to the slowdown in productions and operations, and sluggish spending patterns.
As a result, second-quarter corporate earnings are expected to have suffered significantly. According to the latest Zacks Earnings Preview article, total earnings for the S&P 500 members will likely be down 44.1% year over year on 10.9% lower revenues in the to-be-reported quarter.
Though the coronavirus outbreak has had a sector-wide impact, the U.S. tech sector seems more resilient compared with the other sectors. Per the Earnings Preview article, tech sector earnings are expected to decline 13.5% on 1.2% lower revenues.
Why Tech Sector Could Outshine in Q2?
The coronavirus outbreak has, surprisingly, opened up newer avenues of growth for several industries in the broader tech sector. Due to the global lockdown, the adoption rate of Internet-based services and apps has been increasing rapidly as people are compelled to stay indoors.
Moreover, the work-from-home wave globally is bolstering demand for advanced technology-based virtual meetings and conference tools. Additionally, the work-and-learn from home necessity has propelled demand for PCs, notebooks, peripheral accessories, and cloud storage.
All these, in turn, are aiding growth for high speed Internet services. Additionally, the rising demand for robust communication networks is another positive. Further, the growing proliferation of AI technology, and cloud computing products and services in managing this pandemic situation is a tailwind.
All these trends are stoking demand for semiconductor chips. Notably, Micron Technology MU reported better-than-expected third-quarter fiscal 2020 results last month. The company stated that the lockdown situation has spurred significant chip demand from data-center operators.
Apart from these, the adoption rate of streaming services for entertainment has surged in this ‘stay at home’ scenario.
All these positives will encourage investors to buy tech stocks.
As the second-quarter earnings season will commence with the JPMorgan JPM earnings release on Jul 14, estimate-beating stocks will be the most important ones from an investment point of view. We believe investors should always hunt for such stocks before an earnings release. This strategy would place them ahead of time, and help bet on stocks that are rich in quality and have higher chances of beating earnings estimates.
Strategy to Pick Stocks
We have used several selection criteria for our picks. First, we selected large-cap (over $10 billion in market cap) stocks as these companies have been doing businesses for a long time and their stock prices are generally stable. Secondly, these stocks have robust fundamentals that help them stay afloat in a turbulent economic and business environment.
Third, all these stocks are expected to release earnings reports within the next 30 days and have a positive Earnings ESP. Finally, each of our picks carries either a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Our research shows that for stocks with the combination of a Zacks Rank #3 or better and a positive Earnings ESP, the chance of an earnings beat is as high as 70%.
Cognex Corporation CGNX designs, develops, manufactures, and markets machine vision systems. The company, which will report second-quarter 2020 results on Jul 29, has an Earnings ESP of +9.09%. The Zacks Rank #3 company delivered positive earnings surprises in each of the trailing four quarters, the average beat being 84.97%.
Cognex Corporation Price and Consensus
Cognex Corporation price-consensus-chart | Cognex Corporation Quote
Alphabet GOOGL is one of the most innovative companies in the modern technological age. Over the last few years, the company has evolved from primarily being a search-engine provider to cloud computing, ad-based music and video streaming, autonomous vehicles, healthcare providers and others.
The company, scheduled to report second-quarter 2020 results on Jul 23, has an Earnings ESP of +10.81%. In the last four quarters, this Zacks Rank #3 company has surpassed earnings estimates on two occasions for as many misses, the average positive surprise being 4.85%.
Alphabet Inc. Price and Consensus
Alphabet Inc. price-consensus-chart | Alphabet Inc. Quote
Facebook, Inc. FB is the world’s largest social media company. This Zacks Rank #3 company is scheduled to report June-end quarter results on Jul 29. The company has an Earnings ESP of +9.36% for the to-be-reported quarter. In the preceding four quarters, it surpassed estimates on two occasions for as many misses, the average negative surprise being 10.17%.
Facebook, Inc. Price and Consensus
Facebook, Inc. price-consensus-chart | Facebook, Inc. Quote
PayPal PYPL is one of the world’s largest online payment solutions providers. The company has an Earnings ESP of +5.39% for the April-June quarter. In the past four quarters, this Zacks Rank #3 company beat the consensus mark on three occasions and missed in the other, the average positive beat being 5.90%. PayPal is set to release results on Jul 29, after the closing bell.
PayPal Holdings, Inc. Price and Consensus
PayPal Holdings, Inc. price-consensus-chart | PayPal Holdings, Inc. Quote
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it’s predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce “”the world’s first trillionaires,”” but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks’ 3 Best Stocks to Play This Trend >>
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