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Why Telecom May Be a Good Call

Analysts don't have much hope for earnings season. Companies in the Standard & Poor's (MHP) 500-stock index are expected to report a 35% drop in profits for the second quarter from the year before. But a few surprises may be in store: In the first quarter, two-thirds of S&P 500 companies beat expectations. To spot potential winners, look at the difference between the highest analyst estimate and the lowest one. Companies that surpassed the average estimate in the first quarter tended to have narrow spreads while those that disappointed had wider ones. What does this measure portend now? Telecoms, including Cisco Systems (CSCO) and Juniper Networks (JNPR), boast a difference of less than 5 cents between the high and low estimates. The spread nears $1 for energy giant Sunoco (SUN) and investment bank Morgan Stanley (MS).

Will There Be an Encore?

Few earnings will be as closely watched as those of the big banks. Investors celebrated when firms finally reported profits in the first quarter. Since Apr. 1 the sector is up 19%. But the supersized gains may be tough to repeat. Why? Investors likely will focus on quality of earnings. They'll want confirmation that companies can continue to scoop up market share and generate trading gains, says Douglas Burtnick, a manager at Aberdeen Asset Management. If banks don't produce, the stocks near their recent highs, including Goldman Sachs (GS) and JPMorgan Chase (JPM), may get whacked.

All Eyes on Alcoa

Alcoa (AA), the first company in the Dow Jones industrial average to report profits, kicks off earnings season on July 7. The results of the aluminum maker, typically a bellwether for the economy, may offer hints about whether the recession is easing or not.

But the bottom line isn't the best indicator, since Alcoa's earnings are closely tethered to the price of the metal. Instead, investors should pay attention to what management says about customer orders. The company provides aluminum for cars, aerospace manufacturing, residential construction, and other areas. If orders are picking up, it could be a sign that an economic rebound may be around the corner. "They seed multiple components of the economy," says Citigroup (C) stock analyst Brian Yu. "If there's more demand than supply, that's a positive.

Yu figures investors have overly punished Alcoa. At 10.44, the stock is trading 71% off its 52-week high. He rates the stock a buy.

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