Hickey: Past Shows Lower Earnings Expectations Boost Stocks

April 14, 2015

Industrial Select SPDR (XLI | A-91)

Hickey likes XLI and the industrial sector in general, thinking that earnings revisions have been revised downward to the point where they've overshot the mark—and that surprise to the upside may occur. He cites XLI by name, and why not? The fund leads the U.S. industrials segment in assets and dominates in liquidity, while delivering a basket that represents the segment well. Hickey notes that huge multinationals dominate the portfolio, and that's certainly true in the case of XLI. The ETF pulls from the S&P 500 rather than the full universe of U.S. stocks, so large-caps get an extra boost. Still, XLI's allocation to leader General Electric aligns with—rather than exceeds—competing cap-weighted ETFs. Note too that GE itself is becoming more "pure-play" industrials as it spins off financing operations.

Vanguard Consumer Staples (VDC | A-95)

Another sector that has been hit hard by negative analyst sentiment recently is consumer staples. The earnings weakness caused by the dollar's strength in the large multinational companies that make up the sector is already baked into their stock prices. In Hickey's view, when the bar is set that low, it won't be hard for these companies to surpass earnings expectations and provide a reason for investors to bid up their shares again. VDC is our "Analyst Pick" for this sector. The fund delivers pure-play consumer staples exposure for a mere 12 bps annual fee. VDC tracks its index extremely well and has sufficient liquidity for large as well as retail investors.

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