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3 Sectors to Avoid this Earnings Season

Well, we’re once again in the thick of quarterly reports — and once again in the thick of some ugly forecasts that predict poor earnings and sales for many S&P 500 companies.

Consider that the estimated S&P earnings growth rate for Q4 2012 is a measly 2.4% — down dramatically from an estimated 9.2% growth rate on Sept. 30. Ouch!

The old platitude that it’s a “stock picker’s market” may hold true, with a few standouts showing they can buck the trend. But by and large, the landscape looks disappointing for Q4 EPS and revenue — especially considering how quickly expectations are moving lower.

So what sectors are looking the worst? Based on my read of in-depth FactSet data on earnings expectations and guidance, the three industry groups backpedaling at the fastest rate are information technology, materials and industrials.

Financials are ugly too, with the sector’s growth rate gutted, but at least the industry still is projecting double-digit EPS expansion vs. earnings declines elsewhere.

Here’s the lowdown:

Guidance Sucks Overall: For the Q4 earnings season we are entering, 78 S&P companies have issued negative EPS guidance vs. 32 companies with positive guidance.

Healthcare Turns Negative: On Sept. 30, the forecast for healthcare was for modest 1.9% earnings growth. Now the outlook is a decline of 2.6% thanks in part to the recent downward revision at Abbott Laboratories (NYSE:ABT) and other big-name stocks. Other big moves down in estimates come from elsewhere in pharma, including Pfizer (NYSE:PFE) on continued trouble without blockbuster Lipitor and Teva Pharmaceuticals (NYSE:TEVA), which is fearful about the effect of Obamacare on generic pricing.

Materials Forecast Cut 75%: On Sept. 30, the forecast for materials stocks boasted a stunning 23.9% EPS growth rate. Now forecasts call for just 6%. According to FactSet data, metals and mining took it hardest, with growth projections plummeting from 37% to just 4%. No surprise there, seeing as copper, steel and aluminum prices finished 2012 with a whimper despite a hopeful 2011.

IT in the Red: On Sept. 30, the projected earnings growth for the information technology sector of the S&P 500 was 8.3%. Now it’s -2.8%. It’s easy to blame negativity on Apple (NASDAQ:AAPL) for this, as the computers & peripherals subsector now is projecting 6% contraction from 11% growth on Sept. 30 thanks to fears over Apple’s growth. However, semiconductor businesses are also a big drag, including Advanced Micro Devices (NYSE:AMD), which has seen an ugly revision to forecasts — now a 21-cent loss from a 6-cent profit previously — and Texas Instruments (NASDAQ:TXN), which is projected to earn just 7 cents instead of forecasts for 38 cents on Sept. 30.

Financials Lose Ground Fast: Another notable group of stocks in trouble is the financial sector. The growth rate on Sept. 30 was 27.8% according to FactSet, and now it’s just 15.5%. That’s still nice, but the direction is disturbing. Leading decliners appear to be in the insurance sub-sector, with EPS forecasts moving from a 2% decline to a whopping 40% decline — obviously due to severe weather. Consider AIG (NYSE:AIG), which is forecasting a 4-cent loss after a 76-cent profit projected on Sept. 30, or Dow component Travelers (NYSE:TRV) looking at a mere 10-cent profit after EPS forecasts of $1.69 previously.

It’s worth noting we often play a shell game in advance of earnings, where analysts move the bars lower so companies can more easily step over them. And of course there’s no guarantee that just because forecasts have rolled back for this quarter, the long-term trajectory of many companies can’t continue to point higher. After all, there was a lot of uncertainty in Q4 including the election, the fiscal cliff and Superstorm Sandy. Those seem like significant events worthy of a change in forecasts.

However, investors need to come to grips with the fact that earnings and revenue are slowing down, and it’s not as simple as moving Q4 growth into Q1. The reality is the market always will face uncertainty and excuses; at the end of the day, the only thing that matters is the bottom line.

Unfortunately for investors in materials, IT and healthcare, the bottom line is not looking very impressive this earnings season.

Check out the complete Factset “Earnings Insight” report here. It’s long but full of great information.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in Apple.

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