Stock ETFs Most Likely to Win the 'Revenue' Race

The closest thing that this market has seen to a correction was the 7% pullback in July, prior to Q2 earnings results. Similarly, the closest thing we’ve seen since July is the 5% pullback from an intra-day S&P high of 1080 on 9/23/09 to 1020 on 10/2/09; once again, trepidation has occurred before earnings reports.

Of course, the better-than-anticipated July results received an artificial boost… both from drastic cost-cutting by businesses and extreme analyst pessimism. More than 3 out of 4 companies exceeded profitability expectations, but only half were able to beat revenue expectations. And that was after analysts had already slashed revenue forecasts!

In Q2, investors chose to focus on “bottom line” profitability. Yet cost-cutting, primarily through layoffs, can only take you so far. If companies don’t demonstrate revenue growth in Q3 such that they are selling their products and services once again, stocks could wobble.

That said, some segments seemed poised to make positive statements. And if past is prologue, it’ll be tech, energy and materials leading the way.

Without the benefit of foresight on Q3 revenue growth, I decided to run a Morningstar screen using the following criteria: (a) 25% Q2 2009/Q2 2008 revenue growth, (b) 10% Q2 2009/Q2 2008 operating income growth and (c) Overall “Growth Grade” of A or better by Morningstar. Only companies with $100 million in market cap were considered.

Of the 74 stocks that passed the screen, a sizable number were Internet providers or net products/services like Baidu (BIDU), Sohu (SOHU), Google (GOOG) and SalesForce.com (CRM). ETFs that would benefit here might include First Trust Internet (FDN), Vanguard Information Technology (VGT) and iShares GS Networking and MultiMedia (IGN).

The other areas that accounted for the most growth included materials companies from Potash to Rio Tinto to Schnitzer Steel. Global Materials (MXI) could continue its advance.

Energy stocks were almost as impressive; in particular drillers like Transocean and Diamond Offshore were commonplace, giving a possible leg up to SPDR Oil/Gas Production/Exploration (XOP) as well as SPDR Oil Equipment/Services (XES) and Global Energy (IXC).

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.