Earnings Estimates Favor Industrial, Health ETFs

07/03/07 - 10:25 AM EDT

The Energy Select Sector SPDR ETF (symbol - Cramer's Take - Stockpickr) (XLE - Cramer's Take - Stockpickr), which has been the driver behind the S&P's rapid profit growth for years, is stalled with an estimated 2% growth.

Earnings of firms in the Materials Select Sector SPDR (XLB - Cramer's Take - Stockpickr) ETF, another cyclical sector, have estimated second-quarter growth of around 4%. But contrast the difference in valuation between these two sectors, where earnings are difficult to predict and are subject primarily to the future direction of commodity prices.

The Energy Select ETF has the lowest P/E ratio of any sector at about 12 times estimated earnings for this year, compared with more than 16 times price/earnings for the Materials ETF.

Recent evidence that the economy may be reaccelerating could make defensive sectors less attractive to investors. The Consumer Staples Select Sector SPDR's ETF (XLP - Cramer's Take - Stockpickr) estimated second-quarter earnings growth is just 1.7%, and it is already trading at a lofty 18.3 times anticipated 2007 EPS.

The Utilities Select Sector SPDR (XLU - Cramer's Take - Stockpickr) ETF is doing a bit better, with about 5% estimated growth for the quarter. This is despite having more than doubled over the past few years and depressing dividend yields to just 3.0%. That's still the highest of any Sector SPDR, but it nonetheless must compete with 10-year Treasuries now yielding more than 5%.

Finally, the Health Care Select Sector SPDR (XLV - Cramer's Take - Stockpickr) ETF had estimated earnings of a respectable 7.7% for the quarter. The pharmaceutical firms that dominate the index are expected to grow slower, while health care equipment and services firms grow double-digits earnings. This ETF is trading at about 17 times expected full-year earnings, just a slight premium to the market multiple.

P/E Ratio on 2007E EPS