Beware of these stocks with low earnings quality that could blow up your portfolio


Wolfe Research says that some stocks may cause problems in portfolios. In a recent note, Wolfe Research strategists said that stocks are priced to perfection in light of the slowing economy. We expect earnings disappointments will result in more stock crashes in the future. The Wall Street firm created its own proprietary quarterly earnings score which, according to the company, is a way objectively to identify accounting-related risks. The system uses sentiment and valuation metrics along with seven financial ratios to identify potential underperforming stocks. Wolfe Research’s second-quarter earnings report analysis focused on balance sheets and cash flows statements of more than 2,000 firms. The following are the companies with the lowest scores on Wolfe’s screen (0 being the lowest and 100 the highest). The firm’s low earnings basket, which includes firms with an EQ of less than 10, underperformed S & P by 800 basis points in the first half of this year. Wolfe said that historically, its screen was most effective in identifying “blow ups” in consumer, technology, industrial, and communication services sectors. Endeavor Group, and The Trade Desk had the lowest scores in the communication sector. Several consumer brands also made the top 10, including Hasbro, Tesla, Wyndham Hotels & Resorts, and Under Armour.