2012’s Market-driving Sector: My Four Top Stocks

What Q4 Earnings Growth Is SayingThe fourth-quarter earnings season is here and it will help to dictate the trading action over the next several months. There are high hopes of higher sales growth this earnings season in addition to earnings acceleration as the economy recovers, but the fourth quarter is estimated to show a decline in earnings growth and this is expected to continue in the first quarter-earnings season.

In the third-quarter earnings season, we did not see a consistent increase in revenues or the growth was marginal. In order to feel more confident, revenue growth needs to be strong.

The fourth-quarter earnings season is estimated to show a decline over the third quarter and this is a concern. For the fourth-quarter earnings season, estimates call for earnings to rise a mere 7.8% as of January 9, well down from the 15% as of October 3, according to Thomson Reuters.

Early on, of the 26 S&P 500 companies that have reported, only 54% exceeded estimates and 27% fell short. These early results are well below the third-quarter earnings season in which about 67% of S&P 500 companies beat estimates and 19% fell short. The blended S&P 500 earnings growth rate for the first-quarter earnings season is estimated at a weak 5.4%. This is worrisome.

In my view, the key will continue to be the ability of companies to report higher sales, which is what you want to see during an economic recovery. It indicates stronger spending and the increased confidence levels of consumers and companies in spending. But also be aware that the earnings side can be made to look better via aggressive cost cuts and control. In addition, watch for the guidance going forward, as this will also be a critical factor.

Alcoa, Inc. (NYSE/AA) started the earnings season after beating on revenues and coming in line with earnings. I was encouraged to hear that Alcoa predicted a deficit in the global aluminum market, which is important, as the metal is used broadly across numerous applications, including car motors, bike frames, tools, industrial use, and planes. What is important is that this indicates a potential pickup in global demand for goods.

Going forward, I continue to believe that technology will be the driver of the stock market going forward into the next several years. Take any opportunity to buy on weakness.

I have listed some of my favorites below (but note that these are not recommendations to buy; just examples of good opportunities out there):

Internet star Google Inc. (NASDAQ/GOOG) is why I love technology stocks. In the third quarter, Google blew away on revenues and earnings by a wide margin. The company’s addition of Motorola Mobility Holdings, Inc. (NYSE/MMI) will help Google in aggressively pushing sales of its “Android” phones.

Apple Inc. (NASDAQ/AAPL) continues to be the star and I expect continued strong results this year, especially with sales of “iPads” and “iPhones.” I advise taking the opportunity to buy Apple on the current weakness. My view is that the company is on fire and there is no stopping the momentum now, as Apple is in its own bull market.

Chipmaker Intel Corporation (NASDAQ/INTC) is the dominant chipmaker in the world and its concerted move into more mobile applications should pay off.

Yahoo! Inc. (NASDAQ/YHOO) needs a change of direction and may be on the verge of a potential takeover by private equity.

As I have said, the key will be revenues, especially organic growth. We want to see revenues grow to drive earnings instead of cost cuts. Without revenues growing, it is difficult to imagine a healthy economy.

Technology will continue to be the growth driver going forward, but be careful in the near term. You can read my thoughts on this in Technology Stocks: Invest in Them or Run for the Hills?