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Can Q4 Earnings Revitalize Healthcare ETFs?

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The healthcare sector has long been a victim of concerns over increased regulatory scrutiny related to high drug prices. While the worries cooled down after Trump's victory, the biotech and pharma stocks were again troubled by the President's non-friendly plan to lower drug prices (read: Trump Attacks Biotech & Pharma: ETFs Bleed ).

Further, Trump signed an executive order to repeal and replace the Affordable Care Act, which covers some 20 million Americans, soon after he takes office. This would have both a positive and a negative impact on healthcare stocks. All these suggest that more pain might be in store for the healthcare sector in the coming months.

As a result, healthcare ETFs saw rough trading, with the popular funds - Health Care Select Sector SPDR Fund XLV , Vanguard Health Care ETF VHT , iShares U.S. Healthcare ETF IYH and Fidelity MSCI Health Care Index ETF FHLC - losing nearly 1.4% over the past five days.

However, Q4 earnings could bring some near-term relief given that the sector is expected to post earnings growth of 2.9% and revenue growth of 5.6%, as per the Earnings Trends . Let's delve deeper into the earnings picture of some of the largest companies in the healthcare space that will drive the performance of the above-mentioned funds in the coming days.

Some of the big names dominating the funds include Johnson & Johnson JNJ , Pfizer PFE , Merck MRK , Amgen AMGN , AbbVie ABBV , Gilead Sciences GILD and Bristol-Myers Squibb BMY . All these stocks collectively account for 40% share in XLV, 38.3% in IYH, 35.2% in VHT and 34.4% in FHLC.

According to the our surprise prediction methodology, a Zacks Rank #1 (Strong Buy), #2 or #3 when combined with a positive Earnings ESP increases the chance of an earnings beat, while a Zacks Rank #4 or #5 (Sell rated) are best avoided.

You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Inside Our Surprise Prediction of These Stocks

Johnson & Johnson is slated to release results before the opening bell on January 24. It has a Zacks Rank #3 (Hold) and an Earnings ESP of -0.64%, indicating a lower probability of beating estimates this quarter. Though the company delivered an average positive earnings surprise of 2.47% in the last four quarters, the magnitude of earnings estimate revision has fallen by a penny over the past three months. The stock has a Value, Growth and Momentum Style Score of B, C and F, respectively.

Pfizer has a Zacks Rank #4 (Sell) and an Earnings ESP of 0.00%. The Zacks Consensus Estimate for fourth-quarter 2016 is 50 cents, down four cents over the past three months. However, the stock delivered positive earnings surprises in three of the past four quarters, with an average beat of 6.34%. Additionally, it has an unimpressive Growth and Momentum Style Scores of D and F, respectively, though a Value Style Score of B is favorable. Pfizer is scheduled to report its earnings on January 31 before the opening bell.

Merck is expected to report its results on February 2 before the market opens. It has a Zacks Rank #3 and an Earnings ESP of +1.14%, indicating a reasonable chance of beating estimates this quarter. Though the stock witnessed a negative earnings estimate revision of six cents over the past 90 days for the to-be-reported quarter, it delivered positive earnings surprises in the last four quarters, with an average beat of 4.30%. The stock has an unfavorable Growth and Momentum Style Score of D and F, respectively, while a Value Style Score of B looks good (see: all the Healthcare ETFs here ).

Amgen has a Zacks Rank #3 and an Earnings ESP of 0.00%, which makes surprise prediction difficult. The earnings surprise track over the past four quarters is robust with an average positive surprise of 10.01%. Like its peers, Amgen also witnessed negative earnings estimate revision of a couple of cents over the past 90 days for the yet-to-be-reported quarter. Though the stock has a solid Value Style Score of B, the Growth and Momentum Style Score of C and F, respectively, looks dull. Amgen will report earnings on February 2 after market close.

AbbVie has a Zacks Rank #3 and an Earnings ESP of 0.00%, which makes surprise prediction difficult. The company delivered positive earnings surprises in the last four quarters, with an average beat of 1.92%. It saw no earnings estimate revision over the past three months for the to-be-reported quarter. The stock has a solid Value Style Score of B while the Growth and Momentum Style Score of C each is unimpressive. The company is scheduled to report on January 27 before the opening bell.

Gilead is expected to release its earnings on February 7 after market close. It has a Zacks Rank #3 and an Earnings ESP of -50.44%, indicating lower chances of beating estimates. Gilead saw a negative earnings estimate revision of 40 cents over the past three months for the to-be-reported quarter but delivered positive earnings surprises in two of the last four quarters, with an average beat of 2.40%. Though it has a solid Value and Momentum Style Score of A and B, respectively, the Growth Style Score of C looks ugly (read: Ten Predictions for the ETF Industry in 2017 ).

Bristol-Myers will likely report its earnings on January 26 before the opening bell. It has an unfavorable Zacks Rank #4 and an Earnings ESP of -1.52%. The stock delivered positive earnings surprises over the past four quarters with an average beat of 17.32% but saw negative earnings estimate revision of 10 cents for the to-be-reported quarter. Though a Momentum Style Score of B looks good, the stock has an unfavorable Value and Growth Style Score of C each.

Summing Up

Given that most of the companies have an unfavorable Zacks Rank and a few earnings surprises in store this season, healthcare ETFs are likely to remain range bound. However, the dip could be a buying opportunity for investors as XLV and FHLC sport a Zacks ETF Rank #1 (Strong Buy) and VHT and IYH carry a Zacks ETF Rank #2 (Buy).

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Bristol-Myers Squibb Co. (BMY): Free Stock Analysis Report

Pfizer Inc. (PFE): Free Stock Analysis Report

Johnson & Johnson (JNJ): Free Stock Analysis Report

Merck & Co. (MRK): Free Stock Analysis Report

Gilead Sciences Inc. (GILD): Free Stock Analysis Report

Amgen Inc. (AMGN): Free Stock Analysis Report

AbbVie Inc. (ABBV): Free Stock Analysis Report

SPDR-HLTH CR (XLV): ETF Research Reports

VIPERS-HLTH CR (VHT): ETF Research Reports

ISHARS-US HLTHC (IYH): ETF Research Reports

FID-H CARE (FHLC): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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