It’s still early in the second quarter earnings reporting season, but results look encouraging so far ... especially for some of our favorite market sectors.

As of last Friday, 345 companies had reported second quarter sales and profit results, including 144 companies in the S&P 500 Index.¹

Among these are some big names — representing 44 percent of the S&P 500 Index by market cap — and early returns look promising for market conditions:

Seventy-five percent of S&P 500 firms reporting have exceeded profit expectations, and they’ve done so by a respectable margin of 8 percent above estimates …

Significantly, 77 percent of S&P 500 firms reporting thus far have posted top-line sales beating forecasts as well — with revenues up nearly 10 percent year-over-year.²

Flush with cash, the number of firms increasing dividend payments surged 32 percent last quarter with overall cash dividends up 11 percent in the first half of 2011!³

We find those last two statistics particularly encouraging.

First, we see growing top-line sales as solid evidence that American businesses are successfully transitioning from the initial phase of profit growth driven mainly by cost-cutting to a more sustainable period of organic top-line growth now.

Second, we believe that increasing cash dividends are a positive fundamental sign of underlying financial strength in corporate America. We all know it can be the kiss of death if a public company is forced to cut its dividends.

So firms that boost dividends convey confidence that their future profits and corporate cash flows will remain strong enough to sustain higher dividends longer term.

Keep an Eye on Guidance

While corporate results have been upbeat so far, be aware of a couple caveats.

Forward-looking guidance for sales and profit results in future quarters has been mixed. Although it’s too early to be concerned at this point, 5.8 percent of reporting companies have raised forward profit guidance compared with 6.1 percent that have lowered profit expectations.

The true underlying trend in corporate profits will take time to reveal itself as the full earnings season unfolds.

This week alone almost 1,000 firms will announce results, including 184 companies in the S&P 500. By five o’clock Friday more than 60 percent of the S&P 500 will have reported second quarter results. At Banyan Partners, we’ll be following these results closely.⁴

Getting Paid for Performance

Firms posting positive sales and/or profit surprises so far this earnings season are often being rewarded with sharply higher share prices.

Case in point, a favorite technology stock on the Banyan Buy List: Apple Inc. (Nasdaq: AAPL) reported quarterly profits of $7.79 per share last Tuesday – that was 33 percent better than consensus estimates.⁵

It was no surprise to us when AAPL shares beat forecasts and the shares surged 5.7 percent higher in just a few days since the release.

Another favorite in the basic materials sector, Mosaic Co. (NYSE: MOS) has moved almost 4 percent higher since the fertilizer giant reported better-than-expected sales and profits last week.⁶

In this market environment it’s clear that investors can’t count on a rising tide to lift all boats … not anymore. Instead, as we’ve been stressing throughout the year, it’s very much a stock picker’s market with greater differentiation among individual stocks and sectors.

When all is said and done, the stocks and sectors that deliver the best results generally are getting rewarded and, in turn, rewarding shareholders. In other words, you’re getting paid for financial performance that’s above expectations — just as it should be.

This plays to Banyan Partners’ investment approach: An opportunistic, sector-specific investment style that is focused on taking advantage of the big-picture trends in the global economy.

In fact, the best results so far this quarter are being driven by cyclical stocks and sectors that we have long favored on our Banyan Buy List.

For instance, second quarter profits for energy and materials companies are growing nearly 65 percent year-over-year — with sales up 25 percent …

Earnings at technology and industrial companies meanwhile are expanding 33 percent and 28 percent, respectively — with eight out of 10 companies in these sectors beating expectations ...

Guidance remains bullish for cyclical companies, too, with energy, materials, tech and industrial firms expected to post full-year 2011 profit growth of 29 percent on average.⁷

By comparison, overall S&P 500 profits are on pace to grow 16 percent this year, or only about half as much as these four cyclical sectors.

These are the sectors that our own independent research led us to overweight in our Banyan core equity accounts, as we pointed out in a recent issue of the Banyan Market Letter.  

Despite an environment of slow, uneven economic growth — with the US economy expanding less than 2 percent — certain stocks have been delivering solid returns for investors. This is why it’s more important than ever to be positioned in the right stocks and sectors that have the potential to deliver better results.

Of course, we understand that investors may also want some safeguards for their portfolio. Indeed, we’re frequently asked: ‘How do you go about protecting a stock portfolio in today’s volatile markets?’  

Perhaps, the most important thing you can do is to start with the investments themselves! Do in-depth, solid research and then and only then, buy shares in solid companies that are consistently proving themselves with positive financial results and that have a catalyst to help support a higher share price over time. After that, there are additional short-term, tactical investments you can make to help protect short-term declines in your portfolio.

Even though it’s still early in the second quarter earnings season, we’ll be carefully monitoring results over the next several weeks.  Thus far, sales and profit growth look good, with positive surprises among several of the stocks and sectors we favor. 

Bottom line: Our portfolio management team continues to overweight the stocks and sectors that we believe can deliver the biggest upside as the global economy rebounds. Sectors like energy, basic materials, technology and industrials, among others, are benefiting from strong secular growth trends internationally, in spite of the short-term uncertainty about US economic growth prospects.

Good investing,

Mike Burnick
Director of Client Communications
Banyan Partners, LLC

P.S. To find out more about which sectors and markets offer the best potential right now, go here now to download a copy of our just-published Banyan Partners Quarterly Outlook.

Banyan Partners and the advisory accounts that we manage may have option positions and/or long or short positions in the securities mentioned in this report and may purchase or sell such securities without notice.  This newsletter is not a complete analysis of every material fact with respect to any company, industry or security mentioned in this report.

The investments discussed in this newsletter may not be appropriate for all investors and past performance is no guarantee of future results.  Investors must make their own decisions based on their specific investment objectives, risk tolerance, and financial circumstances.  This report is solely for informational purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.

¹ Deutsche Bank: US Equity Strategy, 7/22/11
² Ibid.
³ Standard & Poor’s, 7/6/11
⁴ Zacks Earnings Preview, 7/22/11
⁵ Fidelity Investments; First Call Estimates, 7/25/11
⁶ Market Watch, 7/18/11
⁷ Deutsche Bank: US Equity Strategy, 7/22/11