We spoke with 3 financial experts, who said to make these 4 trades right now to get ahead of surprising gains when earnings season starts next month

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  • Second-quarter earnings season will kick off in July, with investors eager to see how the wide-reaching impact of the COVID-19 outbreak will continue to affect corporations.
  • Business Insider spoke to three experts who laid out where they think investors should be looking and putting their money ahead of likely market fluctuations.
  • Some of the recommendations are pegged to industry fundamentals, while others look to capitalise on pricing dislocations created by post-coronavirus market turbulence.
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When asked which industries investors might expect to report strong earnings this quarter, ClearBridge Investments’ Michael Clarfeld laughs.

“I’m laughing because it’s difficult to forecast these things normally, but it’s incredibly difficult now,” he said, citing the potential economic impact of recent spikes in COVID-19 cases in various states around the US, which have led firms like Apple to temporarily re-close stores.

Clarfeld, who is a managing director and a portfolio manager at ClearBridge Investments, is not alone in his perplexity. Dozens of companies have themselves suspended guidance amid an increasingly uncertain economic environment.

Meanwhile, gauges on the economy have been mixed in recent weeks. The Commerce Department reported Friday that consumer spending – the driving force underpinning the U.S. economy – rose more than 8% in May after falling the most on record in April, although spending levels are still far below pre-coronavirus marks.

But the recent surges in COVID-19 cases cast uncertainty on how sustainable the upward swing is, and other indicators remain lacklustre: Income dropped 4.2% in May and unemployment still remains relatively high at 13.3%.

Accordingly, some investors are giving less weight to earnings in the near future, at least until economic indicators begin consistently returning to healthier levels.

“Earnings, I would argue, will matter for the high-tech companies that are enormously overvalued, just to provide some kind of narrative around why those valuations might be justified,” said Michael Gayed, a portfolio manager at Toroso Investments who manages the ATAC Rotation Fund (ATACX), which is up more than 40% year-to-date. “But beyond that, I don’t know if earnings matter at all at this point.”

But despite investors placing less emphasis on core earnings figures this quarter given the cautious outlook, there will still be ample opportunities for prepared investors to capitalise on share-price fluctuations. Forward guidance will be closely montiored, as will other potentially market-moving corporate announcements.

Business Insider spoke to three financial experts in order to understand which segments of the market investors should be looking at now to get ahead of surprising gains when earnings season starts next month. Their recommendations are outlined in detail below.

Matt Stucky, portfolio manager at Northwestern Mutual Wealth Management


Stucky recommends that investors look at the home-improvement segment, with a specific eye on companies that are well-positioned in terms of having proper infrastructure for e-commerce.

“You have year-on-year growth that’s really started to accelerate quite a bit there as more people are staying at home,” he said. “And they either have more time to engage in projects that they put off in the past, or they see the stay-at-home situation as sort of a catalyst for going forward with a renovation to make their home situation more enjoyable for the long haul.

Stucky continued: “We would expect a fairly strong trend of these companies reporting earnings in the coming months.”

While Stucky couldn’t name individual stocks, he added that home-improvement stocks have “invested in the type of infrastructure that’s necessary for these kinds of transactions in an e-commerce setting to meet this increased level of demand we’re seeing are the ultimate winners right now.”

He added: “These aren’t the types of investments that you just switch on. These are multi-year investments and have one- or two-day delivery to at-home situations, along with furniture-related spending companies that have good e-commerce delivery solutions.”

Investors seeking exposure to this segment of the market may consider the Invesco Dynamic Building & Construction ETF (PKB). It holds 30 US-listed companies that provide construction and related engineering services for building and remodeling properties.

Michael Clarfeld, managing director and portfolio manager at ClearBridge Investments

ClearBridge Investments / YouTube

Clarfeld said he expects utility companies to perform strongly in coming months.

“We’ve got into utilities in this downturn, because interestingly [they] did not prove particularly defensive in this downturn and have underperformed the market this year, which is sort of counterintuitive given that for many utilities their outlook did not change from a fundamental perspective,” Clarfeld told Business Insider.

He continued: “I think most utilities – every one that we own – reiterated their guidance for the year in spite of COVID. Interest rates have gone down dramatically, so all else being equal, that makes things like utilities and their dividends more attractive.

“In a world of tremendous uncertainty, utilities have meaningfully underperformed and are now traded at a pretty attractive valuation both on an absolute and relative basis – that’s the kind of thing where we think there’s a nice opportunity.”

Clarfield specifically recommends four utility stocks that ClearBridge Investments owns: NextEra Energy(NEE); Edison International (EIX); WEC Energy Group (WEC); and Public Service Enterprise Group (PEG).

Further, investors seeking broad utility-sector exposure may consider the SPDR Utilities Select Sector ETF(XLU), which tracks corresponding companies in the benchmark S&P 500.

Michael Gayed, portfolio manager at Toroso Investments

Real Vision Finance / YouTube

Gayed said he expects the energy and materials sectors to perform well this quarter.

“I would not be surprised to see energy have a sizable comeback,” he told Business Insider. “Aside from the fact that people will be driving more and energy use should be increasing, at the end of the day oil prices are not a free market and if OPEC and other powers that be want the price to go up, they will push the price up.”

He added: “Just like the Fed can manipulate financial markets, so too can the oil producers [manipulate the price of oil]. And if that’s the case then I think a lot of these oil and the materials sector probably has some upside surprise.”

Investors looking for broad energy-sector exposure may consider the SPDR Energy Select Sector ETF (XLE), which tracks corresponding companies in the S&P 500.

Gayed also said that a potential infrastructure bill in the coming months could also be a boost to materials stocks. For interested traders, the SPDR Materials Select Sector ETF (XLB) is the largest and most heavily traded fund tracking the space.

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