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Anyone closely following the on-going Q1 earnings report season would probably have noticed a worrisome pattern: Companies are beating analyst estimates on the bottom line, but are missing out on the top line. This means that most of the earnings growth comes from cost cutting rather than from revenue gains - a trend that is consistent with a slowly growing economy.

Simply put, companies have little room to expand their revenues, either by selling more stuff to consumers or by raising prices because the demand growth isn't there.

What makes this trend worrisome is that, unless the world economy improves, the next earnings reporting season may be ugly, as equity valuations must adjust to the state of the economy. What should investors do?

Look for industries that are an exception to the rule, that is, industries faced with a growing consumer demand, like the homebuilding industry, the healthcare industry and selectively, the technology industry. In the homebuilder industry, for instance, Standard Pacific Corp.'s earnings soared almost threefold in Q1, as sales grew 48 percent from a year ago, while orders for new homes increased 49 percent--homes sold for $375,000, a 9 percent jump from a year earlier.

Selected Homebuilder Revenue and Earnings Growth

Company

Qtrly Revenue Growth (yoy)

Earnings Growth (yoy)

Lennar (LEN)

36.60

284.40

DR Horton (DHI)

40.60

139.40

MDC Holdings (MDC)

58.10

--

Hovnanian (HOV)

32.90

--

Standard Pacific (SPF)

43.80

3,075

Source: Yahoo.finance.com

In the healthcare industry, Aetna's (AET) revenues grew by 7 percent, Cigna's (CI) by 20 percent and United Health's (UNH) by 11.20 - all companies benefited from higher subscriber growth and higher premiums.

Company

Qtrly Revenue Growth (yoy)

Qtrly Earnings Growth (yoy)

Aetna

7%

-4.10

Cigna

20.60

-84.60

UnitedHealth

11.20

-14.10

Source: Yahoo. Finance.com

In the technology sector, there are plenty of companies that continue to grow their revenues at a robust pace, as innovation continues to drive demand for their products. Qualcomm's (QCOM) revenues, for instance, grew by 23.90 percent, LinkedIn's (LNKD) by 12.30 percent, Google's (GOOG) by 31.20 percent and Apple's (AAPL) by 11.30 percent.

Company

Qtrly Revenue Growth (yoy)

Earnings Growth (yoy)

Qualcomm

23.90

-16.30

LinkedIn

72.30

353.3

Google

31.20

15.80

eBay (EBAY)

14.40

18.8

Apple

11.30

-17.90

Source: Yahoo.finance.com

A few worlds of caution: Past performance isn't a guarantee for future performance as the old disclaimer goes on Wall Street. All three sectors are exposed to risks that may undermine sales growth. The homebuilder sector is highly cyclical. The healthcare sector is at the whim of government regulators who may change the rules of the game; and the technology sector at the whim of competition from alternative products that may quickly turn today's winners into tomorrow's losers.

Source: Which Stocks To Hold Beyond The Q1 Earnings Season