Seeking Alpha's Top Quant Picks: Tech and Communication Sectors Ahead of Q2 Earnings

Seeking Alpha's top Quant picks in Information Technology as Q2 earnings approach

With an impressive show so far this year, the S&P 500's Information technology sector (NYSEARCA:XLK) clocked an 8.32% gain in the last three months, making itself the highest outperformer compared to the broader market. The artificial intelligence frenzy led a bull run in tech stocks, with investors rallying on the demand for data driven storage structures and growth to maintain momentum going ahead. The Technology Select Sector SPDR Fund ETF (XLK), which holds a 28.1% weightage on the S&P500, dominated stock boards with players like Nvidia (NVDA), Apple (AAPL) and Microsoft (MSFT). According to Seeking Alpha's Quant Rating system, the sector has an average health score of 3.24. The system awards grades based on quantitative measures, like valuation, earnings growth and recent stock performance. The highest possible score for any individual company is a 5. Looking into individual companies in the sector, 5 stocks were rated as a Buy or higher based on their Quant Ratings, 65 stocks are rated Neutral, while 3 of the stocks were considered a Sell or lower. Seagate Technology Holdings (STX) held the highest Quant score of 4.90, while materials science company Corning (GLW) took the second spot, with a score of 4.78. Higher grades for momentum propelled the higher ratings for the stocks. The sector's heavyweights Nvidia (NVDA), Advanced Micro Devices (AMD), Apple (AAPL), Intel Corp (INTL), Micron Technology (MU) and Microsoft (MSFT) also reported significant gains during the quarter driven by the boom in artificial intelligence technology investments. Although monetization of AI is likely to take longer than initially hoped for, BofA analysts said that hyperscalers are aggressively investing in AI. According to the brokerage, there are no signs of slowing investments, and it believes that the market is in the early innings of an AI investment cycle. "While industry growth is expected to decelerate in the second quarter, AI integration, ecommerce partnerships, increasing use of conversions API, and gradual improvement in retail ecommerce spending could drive meet/beat results in the second quarter," said BofA analyst Justin Post. Earlier in May, Nvidia (NVDA) said it increased its quarterly share dividend to $0.10 per share, a 150% increase from its prior dividend. The company had also briefly become the world's largest publicly listed company by capturing a $3.35T market capitalization. The chipmaker had also beat analyst estimates in its first quarter results, and currently holds a quant rating of 3.49. Advanced Micro Devices (AMD) shares also reported gains, with the company announcing a deal in July to acquire a European artificial intelligence lab, Silo Al. The company held a quant score of 3.36 out of 5. Micron Technology (MU), which holds a quant rating of 3.49, had announced in June, saying that its guidance was in-line with analyst estimates. Apple's (AAPL) deal with Microsoft's (MSFT) Open AI also opened up the potential to innovate in AI applications to integrate its generative AI capabilities into the next iPhone model. Apple and Microsoft hold a quant rating of 3.48 and 3.49, respectively. Solar Edge Technologies (SEDG) has the lowest Quant score of 1.10 in the sector. The Herzliya, Israel-based company, which lost 68.04% in value this year, has a Quant rating of Hold. Seeking Alpha analyst Komal Sarwar wrote in a report, "The S&P 500 continues to achieve new records, with tech stocks expected to drive the bull run in the second half of 2024. Investing in tech ETFs like XLK can offer exposure to the tech sector while lowering risks associated with single-stock investments." S&P 500 companies EPS is expected to grow 9% in the second quarter, with the technology sector rising 16.2%, according to brokerage BofA.

Seeking Alpha's top Quant picks in the Communication Services sector ahead of Q2 earnings

The S&P 500's Communication Services (NYSEARCA:XLC) was one of the better performing sectors that showed gains during the second quarter. The sector, which holds 9% weightage on the S&P500 and boasts of established players including Google-parent Alphabet (GOOG), and Meta Platforms (META), rose 4.1% during the second quarter, inline with the broader market. Overall, it gained 19.17% so far this year, driven by positive earnings and continued momentum from the artificial intelligence trend. According to Seeking Alpha's Quant Rating system, the communication services sector has an average health score of 3.29. The system awards grades based on quantitative measures, like valuation, earnings growth and recent stock performance. The highest possible score for any individual company is a 5. Looking in to individual companies in the sector, two out of 22 stocks are rated as Buy based on Quant Ratings, 20 stocks are rated Neutral, while none of the stocks are considered Sell or lower. Fox (FOXA) is leading with the highest Quant score of 4.39, while Alphabet took the second spot, with a score of 4.26. Profitability, momentum and revisions factors are mostly boosting the ratings for both stocks. Investors were impressed by Alphabet's quarterly first quarter earnings easily cleared analyst expectations as revenues jumped 15% with strong performance particularly at YouTube. Fox, in May, also reported third quarter results that topped Wall Street's estimates. Meta and streaming giant Netflix (NFLX) have Quant scores of 3.47 and 3.48, respectively. Market watchers were disappointed after the Facebook owner's guidance in April for the current quarter came in on the light side, while Netflix stock saw a decline even after its first-quarter earnings surpassed expectations. Disney (DIS), another popular stock in the sector with a market valuation of over $170 billion, received a Quant score of 3.32. Interpublic Group (IPG) has the lowest Quant score of 2.73 in the sector. The New York-based advertising and marketing firm, which lost over 11% since the start of the year, has a Quant rating of Hold. Seeking Alpha analyst Ricardo Fernandez pointed out that XLC continues to surprise with consensus EPS growth of 18% for the YE24-25 period. However, the ETF has a concentrated portfolio with Meta & Google making up 48% of AUM, which can pose a systemic risk. "While industry growth is expected to decelerate in 2Q, AI integration, eCommerce partnerships, increasing use of conversions API, and gradual improvement in retail eCommerce spending could drive meet/beat results in 2Q," said BofA analyst Justin Post. Consensus expects EPS for S&P 500 companies to grow 9% in the second quarter, with Communication Services rising 20.1%, according to brokerage BofA. Meanwhile, a FactSet report stated that the Communication Services sector has recorded the second-largest percentage increase in estimated (dollar-level) earnings of all eleven sectors since the start of the quarter at 1.9%, with Alphabet being the largest contributor to the increase in estimated earnings for this sector since March 31.