“A well-diversified portfolio needs just four stocks,” believes billionaire investor Charlie Munger. Going by his words, we bring to you four stocks from top-ranked Zacks sectors to make the most of this earnings season.  

But why choose stocks from four different sectors? In a volatile market, portfolio diversification is the key to mitigate risks of overexposure to one sector. Currently, markets are suffering from heavy bouts of volatility as investors apprehend a trade war from the bitter exchanges between the Unites States and China over tariffs and also from the recent chemical bomb attack on Syria. In the wake of this, diversification can be considered an ideal way to safeguard one’s portfolio from market upheavals.

Sectors in Spotlight

The Industrial Products, Basic Materials, Construction and Aerospace sectors are ranked as the top four, out of 16, based on our in-house classifications. Over the last 10 years, using a one-week rebalance, the top half beat the bottom half by a factor of more than two. (Learn more: About About Zacks Sector Rank).

Further, per the latest Earnings Trends, earnings and revenues from these sectors are expected to surge in the first quarter, which makes it a good idea to pick stocks from these sectors which are also likely to outperform earnings estimates. But before that, let’s take a closer look at these sectors to find out what has been working in favor of them.

Industrial Products (1 out of 16)
 
Expected Earnings Growth Rate in Q1 — 24.1%
Expected Revenue Growth Rate — 12.5%

Rise in industrial production data indicates that manufacturing activity remains strong. Tax cuts and strong economic conditions have provided a firm basis for manufacturing activity. With the Purchasing Managers' Index touching 50.9% in March, the manufacturing space looks in good shape. A reading of 50 or higher signals at a thriving manufacturing industry in the United States.

Basic Materials (2 out of 16)

Expected Earnings Growth Rate in Q1 — 41.3%
Expected Revenue Growth Rate — 20.3%

Sustained growth, stronger inflation and government policies have worked in favor of the sector to a large extent. The U.S. government’s decision to impose tariffs on steel and aluminum is likely to provide a short-term boost to basic materials. Also, with Trump’s $1.5-trillion infrastructure plan in place, basic materials prices are likely to receive a boost.

Construction (3 out of 16)

Expected Earnings Growth Rate in Q1 — 35.4%
Expected Revenue Growth Rate — 15.8%

Construction sector is in fine fettle buoyed by robust gains from home building investments, strong economic growth and recent tax reforms. Moreover, government project spend is expected to increase in 2018, with the Trump Administration’s $1.5-trillion infrastructure plan in place. As per the study by Dodge Data & Analytics, public works construction is expected rise 3% in 2018.

Aerospace (4 out of 16)

Expected Earnings Growth Rate in Q1 — 13.4%
Expected Revenue Growth Rate — 3.6%

Increasing budget allocations in America -- in view of escalating geopolitical tensions worldwide -- have been boosting the stocks in this space along with a steady improvement in air traffic that has substantially driven commercial airplane demand. Moreover, advent of innovative technologies in warfare and their increased application as well as higher demand for cost-efficient production are driving revenues in the U.S. Aerospace and Defense industry.

How to Pick the Winners for the Season?

Selecting an S&P 500 stock from each top-ranked sector should be the first step. But why S&P 500 stocks? Because such stocks are usually expected to report impressive earnings results, courtesy of their strong balance sheet and solid cash flow.

Total Q1 earnings for the S&P 500 index are expected to be up 16% in the first quarter of 2018 from the same period last year on 7.4% higher revenues, the highest quarterly earnings growth in seven years. Meanwhile, 24 S&P 500 companies have already reported their quarterly results this season with earnings up 39.3% from the prior-year quarter on 11.7% higher revenues, with 75% beating earnings estimates and 70.8% surpassing the revenue mark.

Also, we have ensured that the selected stocks possess a favorable combination of Zacks Rank #1 (Strong Buy) or 2 (Buy) with a positive Earnings ESP. Our research shows that the chance of a positive earnings surprise is as high as 70% for stocks with such a combination. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

From Industrial Products, we suggest A. O. Smith Corporation (AOS Quick QuoteAOS - Free Report) , one of the leading manufacturers and marketers of residential and commercial water heating equipment. The company is slated to report quarterly results on Apr 25.

The company pulled off a positive average earnings surprise of 3.9% in the last four quarters. Powered with the right combination of the two key ingredients — an Earnings ESP of +1.52% and a Zacks Rank #2 — our proven model indicates an earnings beat for the company in the to-be-reported quarter. Also, earnings for the quarter in review are expected to increase 16%. You can see the complete list of today’s Zacks #1 Rank stocks here.

A. O. Smith Corporation Price and EPS Surprise

WestRock Company is our pick from the Basic Materials sector. The provider of paper and packaging solutions is scheduled to report quarterly results on Apr 27.

The company delivered a positive average earnings surprise of 13.5% in the last four quarters. It also has the right combination of an Earnings ESP of +4.57% and a Zacks Rank of #1 —indicating an earnings beat in the quarter to be reported. Earnings for the quarter are expected to increase a solid 53.7%.

WestRock Company Price and EPS Surprise

United Rentals, Inc. (URI Quick QuoteURI - Free Report) from the Construction sector is also a prudent investment choice. The largest equipment rental company in the world is slated to report quarterly results on Apr 18.

The company came up with a positive average earnings surprise of 3.7% in the last four quarters. Backed by the right combination of the two key ingredients — an Earnings ESP of +1.58% and a Zacks Rank #2 — United Rentals is expected to trump estimates in the first quarter. Earnings are also expected to improve a solid 48.2%.

United Rentals, Inc. Price and EPS Surprise

From the Aerospace sector, we propose Northrop Grumman Corporation (NOC Quick QuoteNOC - Free Report) , a leading global security company providing innovative systems, products and solutions in autonomous systems, cyber, C4ISR, strike, and logistics and modernization to customers worldwide. The company is slated to report quarterly results on Apr 25.

The company came up with a positive average earnings surprise of 16.2% in the last four quarters. Backed by the right combination of the two key ingredients — an Earnings ESP of +1.12% and a Zacks Rank #2 — Northrop Grumman is expected to beat estimates in the to-be-reported quarter.

Northrop Grumman Corporation Price and EPS Surprise

Will You Make a Fortune on the Shift to Electric Cars?

Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.

With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.

It's not the one you think.

See This Ticker Free >>