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 (FINISH), rose 4.1% during the second quarter, in line 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, such as 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.

A FactSet report stated that the Communication Services sector has recorded the second-largest 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.