The Zacks Analyst Blog Highlights: Boeing, Home Depot, Utilities Select Sector SPDR, S&P Equal Weight Utilities ETF and Utilities AlphaDEX Fund

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Oct 01, 2014, 09:30 ET

CHICAGO, Oct. 1, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Boeing Company (NYSE:BA-Free Report), Home Depot, Inc. (NYSE:HD-Free Report), Utilities Select Sector SPDR (AMEX:XLU-Free Report), S&P Equal Weight Utilities ETF (AMEX:RYU-Free Report) and Utilities AlphaDEX Fund (AMEX:FXU-Free Report).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Tuesday's Analyst Blog:

Economy Picking Up: Will These Companies Beat Earnings?

The economy looks much more balanced now with consumer confidence moving north, job market conditions steadily improving and the bond-buying program nearing its end. Moreover, a gradual recovery in the housing market and the strengthening manufacturing sector are also helping the economy in shaping up. The cloud of obscurity that had spread over the economy in the first quarter when gross domestic product ("GDP") faltered 2.1% has now disappeared.

The third and final data for GDP is out and reveals that the U.S. economy is rebounding. According to Bureau of Economic Analysis, GDP jumped 4.6% in the second quarter faring better than the second estimate of 4.2% growth and the first estimate of 4% increase. This is the best performance since the final quarter of 2011 that signals a bullish atmosphere for the balance of the year. Higher business investment and export along with improved consumer spending primarily for health services laid the foundation for strong GDP.

Consumer confidence – a key determinant of the economy's health – also improved significantly, reaching the pinnacle this September since July 2013. The data released by the University of Michigan and Thomson Reuters showed that the consumer sentiment index jumped to 84.6 in September from the August reading of 82.5, buoyed by improving fundamentals.

We expect this positive sentiment to encourage consumer spending, which accounts for over two-thirds of U.S. economic activity. The Commerce Department revealed that consumer spending inched up 0.5% sequentially in August, after remaining unchanged in July. This came on the back of a 0.3% increase in personal income that reflects an improvement from 0.2% growth registered in July. We believe that despite favorable economic numbers, the Fed will not be in a rush to increase the interest rate for fear of derailing the recovery with a sudden rise.

With the economy in high gear, it is time to enrich your portfolio with a favorably ranked stock powered by optimism on earnings beat before the earnings season kicks off. This increases your chance of getting higher returns.

Profitable Mix: Favorable Zacks Rank + Positive Earnings ESP

A favorable rank indicates positive estimate revisions by analysts who are optimistic on the future of companies. Then again, Earnings ESP is our proprietary methodology for identifying stocks that have the best chance to surprise with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Here, we have identified 3 stocks with an impressive Zacks Rank and positive Earnings ESP. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Prominent Picks

The Boeing Company (NYSE:BA-Free Report) is a Zacks Rank #2 (Buy) stock with an earnings ESP of +7.04%. The current Zacks Consensus Estimate for the third quarter of 2014 is pegged at $1.99 per share, reflecting an increase of 10.8% year over year. This Chicago-based manufacturer of commercial jetliners, military aircraft, satellites and missile defense registered an average positive earnings surprise of 17.3% over the trailing four quarters, and has a long-term earnings growth rate of 10.7%. The company is expected to report on Oct 22.

The Home Depot, Inc. (NYSE:HD-Free Report) is a Zacks Rank #2 (Buy) stock having an earnings ESP of +0.89%. The current Zacks Consensus Estimate for third-quarter fiscal 2014 is $1.13 per share, which indicates an increase of 18.4% year over year. This Atlanta, GA based home improvement retailer registered an average positive earnings surprise of 4.7% over the trailing four quarters, and has a long-term earnings growth rate of 14.7%. The company's earnings are expected to be released on Nov 18.

Bottom Line

Who doesn't want a portfolio of stocks that have the potential to outperform and beat earnings estimate? You can use Zacks Stock Screener to find other stocks with this winning combination.

Best-Performing Utility ETFs This Year

The U.S. utility sector has performed remarkably well this year. This defensive sector has benefitted from relentless geopolitical tensions stretching from Russia to Iraq that has resulted in elevated levels of risk-off trade sentiment among investors.

The utilities sector is known for its non-cyclical nature and often acts as a safe haven amid market turmoil. The broader utility ETF Utilities Select Sector SPDR (AMEX:XLU-Free Report) returned around 5% in Q1 while SPY advanced only 2.2%. High beta pain, tension between Russian and the West and a freezing U.S. economy led to this noteworthy differential in return.

Though the momentum slowed in Q2 as evident by a 0.2% return provided by XLU versus 2.6% gain in SPY, the sector was still afloat in the U.S. market rally. Over the last one month (as of September 17, 2014), XLU has gained about 2.6% while SPY is up 1.6%.

What Made Utilities a Huge Hit This Year?

Long-term interest rates have been on a downhill ride this year. Yield on 10-year Treasury note fell 38 bps to 2.62% (as of September 17, 2014) from 3%. Many companies in the utilities sector pay out more than that to investors on a regular basis while still allowing for capital appreciation. As a result, yield-hungry investors flocked into the safe utility ETFs in search of yields (read: 3 Utility ETFs Surviving the Market Turmoil).

The sector is also capitalizing on booming population, which is spurring the need for utility supplies like water and power. Notably, the products that the sector offers including power and water can be viewed as essentials having steady demand and not exposed to economic growth cycles (read: The Comprehensive Guide to Utility ETFs).

Given this combination of value and yield, along with the defensive nature of the space, it could be time to give this segment a closer look. Below we have highlighted three utility ETFs that have generated the highest return in the space so far this year.

S&P Equal Weight Utilities ETF (AMEX:RYU-Free Report)

RYU looks to track the S&P Equal Weight Utilities Index. All the components within the fund are given equal weightings. No stock accounts for more than 3.26% of the fund. The ETF presently holds 35 securities with total assets of $83.4 million and 27% allocation toward the top 10 holdings.

The fund is slightly more expensive than the other products targeting this sector. It charges investors 40 basis points and has paid out a yield of 2.87% per year (as of September 17, 2014). RYU is 17.5% up year to date.

Utilities AlphaDEX Fund (AMEX:FXU-Free Report)

The fund employs a unique AlphaDEX methodology of stock selection, which uses fundamental growth and value factors in order to pick securities. Various fundamental analysis factors are used to shortlist stocks. The stocks are then scored on the basis of these parameters with the top 75% stocks entering the fund portfolio.

The unique methodology comes with a fat price for investors, as they are charged 0.70% in expenses. The fund holds 44 securities in its portfolio currently and allocates around 40% in the top 10 holdings.

FXU has amassed about $214.4 million in assets so far. The fund has added about 15.6% so far this year and yields around 2.6% (as on September 17, 2014).

XLU in Focus

XLU is by far the biggest, as well as the most liquid, ETF targeting this space tracking the Utilities Select Sector Index. This index holds 32 securities in all and has net assets of $5.39 billion. The ETF is appropriate for those investors who are looking for a targeted bet on regulated utilities, as well as independent producers and traders of power.

The fund targets the biggest companies in the space. The ETF is heavy on its top 10 holdings with about 59% going to these stocks. XLU returned about 15% to date and has a dividend yield of about 3.49% (as on September 17, 2014).

Bottom Line

Investors should note that the Fed is likely just one month away from leaving the QE era which started in 2008. While the Fed cut its QE stimulus by another $10 billion this month, its dovish commitment to keep the interest rates at a rock-bottom level for a 'considerable time' is adding cheer to the stock markets.

However, the Fed has also indicated a possibility of faster-than-expected rise in rates once the hike procedure takes place. All these might keep utility ETFs under pressure once the Fed starts raising rates (read: Can Utility ETFs Regain Their Lost Momentum?).

However, there is a bullish case scenario too. Though utilities underperform in a rising rate environment, it normally deals with long-term interest rates to fund the heavily indebted capital intensive projects. So, a faster rise in short-term interest rates might cause less damage to this space.

Secondly, the broader stock market might witness a short-term sell-off following the rate hike which might brighten the safe haven appeal of these stocks and the related ETFs. In any case, next year is not going to be as smooth as most of this year was for utilities.

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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