10 profitable shares for uncertain markets

Sales and profits across the 350 largest stocks in the UK have slumped to their lowest level in nine years. With some major sectors under serious pressure, it's no surprise that the FTSE 350 index has fallen by 11% over the past year.

But dig into those numbers and you'll find that some industries are actually doing rather well. It's a reminder that investors need to manage their exposure to potentially troubled sectors and look carefully at earnings trends before diving into the market.

Sectors under pressure

Revenues from the collective top 350 quoted companies that reported results between January and March this year fell by 15.1% on 2015. According to Profit Watch UK from The Share Centre, that represents a drop of £191 billion. At £1.07 trillion, the total revenue pot is at its lowest level since 2007.

Naturally, this pressure on revenues has taken a lump out of profits, too. Operating profits from companies reporting in the first quarter of 2016 fell by two-fifths to £55 billion. Pre-tax profits were down nearly 43% to £50.3 billion.

At one level, this all sounds quite depressing for anyone invested in what are supposed to be the UK's leading companies. Yet closer inspection shows that the main offenders in terms of sliding sales were in banking, oil and mining. Together representing two-fifths of the FTSE 350, these mega-sectors have been damaged by worries over global growth, low interest rates and depressed commodity prices.

But it's not all bad news. Companies with a broader exposure to the UK economy - and particularly those in the consumer, construction and support services sectors - fared a lot better. Rising consumer spending and a booming housing market meant that these industries ticked along nicely.

Avoiding earnings disappointment

For index funds, the disproportionately large weighting of finance and commodities stocks in the FTSE 350 is likely to have caused disappointing returns in recent years. For individual stock pickers, meanwhile, the latest figures are a reminder of the importance of diversifying between sectors.

Indeed, with sales in some sectors under pressure, it could well be worth looking for positive trends in earnings - known as earnings momentum - to find stocks that might be at less risk of suffering a disappointment.

There are various ways of identifying earnings momentum, but for this week's screening strategy for Interactive Investor we've picked out a few key indicators. Among them, we looked for FTSE 350 companies that have a recent history of growing their earnings per share (EPS) - known as the EPS growth streak. They needed to be stocks where analysts are forecasting earnings growth in the coming year.

Plus, we looked for those that have recently had their earnings forecasts upgraded, preferably by multiple analysts. Finally, the QualityRank is used as a guide to the profitability and financial strength of each firm, from zero (poor quality) to 100 (excellent quality).

These rules produce a list that fits neatly with the recent findings on company profitability in the FTSE 350. The strongest momentum is found in construction-related groups like Bellway, Persimmon and Ashtead and consumer-focused firms like Just Eat, Paddy Power Betfair, Zoopla, Reckitt Benckiser and Greggs.

With the benefit of hindsight, you can see that this simple portfolio of stocks would have produced a 15% return over the past year, against the FTSE 350 average that was down 11%.

Watch the price tag

Good quality, profitable and growing companies are some of the most popular investments in the stock market. There are various ways of finding them, but in a climate where some stocks are seeing pressure on sales, looking for positive earnings trends could be a useful strategy.

It's worth remembering that stocks with this sort of profile can end up with expensive valuations that put them out of reach of investors with an eye for a bargain. So it could be worth watching for momentary dips in price. As Warren Buffett famously noted: "Whether socks or stocks, I like buying quality merchandise when it is marked down."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

About Stockopedia

Interactive Investor's Stock Screening series is written by Ben Hobson ofStockopedia.com, the rules-based stockmarket investing website. You canclick here to read Richard Beddard's review of Stockopedia.com and learn more about the site.

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It's worth remembering that these and other investment articles on Interactive Investor are simply for generating ideas and if you are thinking of investing they should only ever be a starting point for your own in-depth research before making a decision.

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Ben Hobson is Investment Strategies Editor at Stockopedia.com. His background is in business analysis and journalism. Ben researches and writes regularly on investment strategy performance and screening ideas for Stockopedia.com. He is the author of several ebooks including "How to Make Money in Value Stocks" and "The Smart Money Playbook"