Northrop Grumman, Parker-Hannifin come out on top in Industrial Quant picks ahead of Q3 earnings

The S&P 500 Industrial Index (SP500-20) sector reversed its Q2 loss and was sharply higher in Q3, with the index being the third-largest gainer among the 11 sectors.

S&P 500 Industrial Index (SP500-20) gained 11.15% during the quarter along with its accompanying ETF, The Industrial Select Sector SPDR Fund ETF (NYSEARCA:XLI) gaining 11.13% almost double from the S&P 500 benchmark index gain of 5.53%.

With earnings for the third quarter right around the corner, Seeking Alpha’s Quant ratings gave the Industrial sector – which makes about 9% weightage in the broader index – an overall health score of 3.35 out of 5, a bit higher than 3.26 at the start of Q2.

Quant ratings recommended about 17 stocks as a Buy or higher, while another 59 stocks were marked as Neutral and 2 stocks did not have any rating.

Ratings under the Quant system are based on quantitative indicators like valuation, earnings growth, and past stock performance.

Leading the pack, Northrop Grumman (NYSE:NOC) was the top-rated company in the sector. Next in line were Parker-Hannifin (NYSE:PH) and Allegion (NYSE:ALLE), which were rated Strong Buy by the Quant system.

Northrop Grumman scores A on revisions and profitability, B+ rating on momentum and growth and D+ on valuation. “Northrop Grumman’s innovation-driven growth, anti-cyclical demand, and expanding international programs position it well for sustained revenue and technological leadership,” said SA Analyst Leo Nelissen.

On the other hand, J.B. Hunt Transport Services (NASDAQ:JBHT) was Quant’s least favored pick, followed by Paycom Software (NYSE:PAYC) and IDEX (NYSE:IEX).

SA Quant gave J.B. Hunt Transport Services (JBHT) 2.65 rating out of 5, based on D- for revisions, D+ for valuation, growth and momentum.

According to FactSet, the Industrial sector has recorded the third-largest percentage decrease in estimated earnings of all eleven sectors since the start of the quarter at -7.4%. As a result, the estimated (year-over-year) earnings growth rate for this sector has decreased to 1.1% today from 9.2% on June 30.

Overall, 64% of the Industrials sector has seen a decrease in their mean EPS estimate, with Boeing (NYSE:BA) being the largest contributor to the decrease in expected (dollar-level) earnings for this sector since June 30.

According to Goldman, Q3 bottom-up EPS growth consensus is expected to be 1%.