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Will Material ETFs Sustain Their Rally as Q4 Earnings Unfold?

The materials sector has been on a tear post-election driven by Trump's policies to revive U.S. manufacturing and rehabilitate the country's aging infrastructure. The President-elect has proposed to spend a trillion dollars on infrastructure by rebuilding highways, bridges, hospitals and other infrastructure projects over 10 years.

Rebounding commodity prices, positive developments in China, pick-up in global manufacturing activities and improving global trends provided further boost to the sector. As a result, Materials Select Sector SPDR XLB , iShares U.S. Basic Materials ETF IYM , Vanguard Materials ETF VAW and Fidelity MSCI Materials Index ETF FMAT gained in double-digits over the past three months. Will this trend continue as Q4 earnings unfold (read: 4 Under-the-Radar ETFs Soaring High After Trump Win ).

Let's delve into the earnings picture of some of the largest companies in the material space that would drive the performance of the above-mentioned funds in the coming days. These include Dow Chemical DOW , DuPont DD , Praxair PX , Air Products & Chemicals APD and LyondellBasell Industries LYB that dominate these fund's portfolio. All these stocks collectively account for the maximum portion, with 39.2% share in XLB, 38.7% in IYM, 28.4% in VAW and 28% in FMAT.

According to the our surprise prediction methodology, stocks with a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) and a positive Earnings ESP are likely to beat earnings estimates, 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

Dow Chemical has a Zacks Rank #4 (Sell) and an Earnings ESP of +4.55%. The Zacks Consensus Estimate for fourth-quarter 2016 is 88 cents, down eight cents over the past three months. However, the company delivered positive earnings surprises in the last four quarters, with an average beat of 16.40%. Though the stock has a solid Value and Momentum Style Score of B each, a Growth Style Score of D is unimpressive. Dow Chemical is scheduled to report its earnings on January 26 before the opening bell.

DuPont is expected to report its results on January 24 before market open. It has a Zacks Rank #3 (Hold) and an Earnings ESP of 0.00%, which makes surprise prediction difficult. The stock saw negative earnings estimate revision of seven cents over the past 90 days for the to-be-reported quarter. However, it delivered positive earnings surprises in the last four quarters, with an average beat of 25.5%. The stock has an unfavorable Value and Growth Style Score of D each while a Momentum Style Score of B looks good (read: Top-Ranked Sector ETFs & Stocks to Buy for 2017 ).

Praxair has a Zacks Rank #3 and an Earnings ESP of -0.71%, indicating a lower chance of beating estimates this quarter. The earnings surprise track over the past four quarters is robust with an average positive surprise of 1.32%. However, the stock witnessed negative earnings estimate revision of a nickel over the past 90 days for the yet-to-be-reported quarter. Additionally, the stock has an unfavorable Value, Growth and Momentum Style Scores of C, D and F, respectively. Praxair will report its earnings on January 26 before the market opens.

Air Products & Chemicals 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 1.84%. Similar to other industry players, this stock also saw negative earnings estimate revision of 11 cents over the past three months for the to-be-reported quarter. Though the stock has a solid Growth Style Score of A, Value and Momentum Style Score of C is unimpressive. The company is schedule to report on January 27 before market open.

LyondellBasell is expected to release its earnings on February 3 before the opening bell. It has a Zacks Rank #2 (Buy) and an Earnings ESP of -7.44%, indicating lower chance of beating estimates. It saw negative earnings estimate revision of 34 cents over the past three months for the to-be-reported quarter but delivered positive earnings surprises in the last four quarters, with an average beat of 2.48%. Though it has a solid Value and Growth Style Score of A and B, respectively, the Momentum Style Score of C is uninspiring.

Summing Up

It seems that material ETFs might struggle to hold onto gains in the coming days as an earnings beat is unlikely for most of the companies. The material sector is expected to see no earnings growth with a revenue decline of 2.5%, as per the Zacks Earnings Trend report. However, the abovementioned ETFs have a solid Zacks ETF Rank of #1 (Strong Buy) in case of IYM and #2 for XLB, VAW, and FMAT (see: all the Material ETFs here ).

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DuPont Co. (DD): Free Stock Analysis Report

Dow Chemical Co. (DOW): Free Stock Analysis Report

Praxair Inc. (PX): Free Stock Analysis Report

Air Products and Chemicals Inc. (APD): Free Stock Analysis Report

LyondellBasell Industries (LYB): Free Stock Analysis Report

SPDR-MATLS SELS (XLB): ETF Research Reports

FID-MATRLS (FMAT): ETF Research Reports

VIPERS-MATERIAL (VAW): ETF Research Reports

ISHARS-US BA MA (IYM): 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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