Surging Profits Boosting Stocks – and These Sectors are Leading the Charge

Donald Trump’s economic policies get a lot of credit for the recent market surge. And there’s no questioning his positive influence on everything from defense to infrastructure to financial stocks, at least from me.

But there’s something else going on, something that gives the rally fundamental legs to stand on: Surging profit growth!

After-tax corporate profits jumped 22.3% from a year ago in Q4 2016, according to just-released figures from the Commerce Department. Not only was that the fourth straight quarter of growth, it was also the single-biggest rise in any quarter going back a half-decade.

But which sectors – and stocks – are leading the earnings charge? To answer that question, I started with Standard & Poor’s profit data for the S&P Composite 1,500 Index. That index is much broader than the S&P 500 because it includes mid-cap and small-cap stocks as well as large caps.

Using those figures, I created this table showing how each of the 11 S&P 500 sectors are performing. It shows how operating earnings per share (or EPS excluding unusual items) actually changed from a year ago in Q4 2016, as well as how analysts currently expect them to change in Q1 2017:

* Energy EPS improved to -$0.87 from -$11.59 in Q4 and to $2.85 from -$3.86 in Q1

We’re seeing very strong performance in materials, where EPS is expected to jump 145% in the first quarter. That’s followed by technology, with profits forecast to rise 44.7%, and healthcare and financials, where earnings are on track to climb 22.2% and 21.7% respectively. The biggest laggards are the S&P’s newest industry group, real estate at -50.4%, and consumer discretionary at -5.2%.

The energy sector is a unique case because it lost money in seven out of the last nine quarters. But those losses shrank dramatically to 87 cents per share in Q4 2016 from $11.59 per share a year earlier. Then in Q1 2017, the sector is expected to record a profit of $2.85 cents per share, a major swing from the year-earlier loss of $3.86 per share. That would also be the strongest showing since the end of 2014.

Next, I took this earnings analysis a step further using the Weiss Ratings Stock Screener system. I created a Screener called “Earnings Leaders in Winning Sectors”, which you can access here as a Weiss Platinum member

The Screener started with a list of all stocks in the top four sectors, as ranked by earnings growth (materials, IT, healthcare, and financials). Then I narrowed it down further to include only BUY-rated stocks with positive year-over-year operating earnings growth and positive total returns on a year-to-date basis. They also needed a market capitalization of at least $50 million, a closing price of at least $5, and a listing on one of the major U.S. exchanges.

This was the list of the top 10 stocks as of late last week. It’s sorted in descending order by year-to-date returns:

Applied Optoelectronics (AAOI, Rated “B-”) was the undisputed winner, with a YTD return of more than 151% and YOY earnings growth of 431%. The Texas-based company sells fiber optic networking products for use in the Internet and telecommunications services industries. Next up was Coherent (COHR, Rated “B”), a California-based provider of lasers and related components used in the industrial, semiconductor, and defense sectors. Operating earnings jumped more than 51% there.

Three healthcare companies also made the top 10 list, led by medical testing equipment and services firm OraSure Technologies (OSUR, Rated “B-”). One financial firm, the mobile banking and prepaid credit and gift card company Green Dot (GDOT, Rated “B-”), came in fifth place.

If you’re looking for stocks with strong earnings growth, relatively high Weiss Ratings, and solid sector tailwinds, start by checking out the companies in my Screener. They have a lot going for them.

As for the broader averages, they really do have more than just Trump’s proposed policies supporting them. If earnings growth continues to come in strong, pullbacks will get bought and the bull trend will remain intact.

Until next time,

Mike