Stocks To Avoid That Can Wreak Havoc On Your Portfolio

Many low-quality stocks are at risk of blowing up in the next few years, Wolfe Research warned investors. 

In addition to using the fourth-quarter corporate results to identify potential underperformance stocks, Wolfe Research also used its earnings quality score to identify potential underperformance stocks based on factors such as sentiment, valuation metrics, and various financial ratios. 

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Over the coming quarters, we expect more stock blow-ups as the Fed tightens, the economy slows, and recession risks increase. Balance sheet and cash flow statements are used in this note as leading indicators of earnings misses,” wrote analysts at Wolfe led by Chris Senyek. 

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It is estimated that the company analyzed approximately 2,400 companies in the U.S. that had a market capitalization of over $250 million. Among this group, Wolfe Research was able to find the stocks that scored in the bottom 10% of its ratings based on earnings quality. As a rule, these types of stocks tend to underperform the market by about 4% on an annual basis. 

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As well as identifying names with high short interest, Wolfe Research identified names in the company's industry with low short interest. In short selling, investors are betting that a stock will decline in value. An investor who shorts a stock borrows shares and sells them at a market price. Shares can be bought back at a lower price if the stock price drops, allowing the investor to profit. 

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Investors short shares of a company based on the short interest. Despite the pessimism expressed by short sellers, seasoned investors can still profit from the information. 

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They listed 10 names with high blow-up risks:

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• Match Group Inc.

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• Bumble Inc.

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• Lululemon Athletica Inc.

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• Tesla Motors Inc.

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• The Estée Lauder Companies Inc.

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• New Fortress Energy Inc.

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• Catalent, Inc.

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• Albemarle Corp.

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• TransUnion

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• QCOM QUALCOMM Inc.

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Its annual report includes high-risk stocks like Tinder, which is owned by Match Group. Shares of Match Group fell 7.2% in 2023 and had an earnings quality score of just 11.

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For nine out of the last twelve consecutive quarters, Match Group's GAAP earnings have increased by at least 20% in accordance with GAAP accounting principles. Since there are consistent differences between GAAP and non-GAAP earnings, the likelihood of these earnings persisting is low, which is another negative sign for the stock.

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Bumble, a company that competes with Tinder when it comes to dating, made the list as well with a score of 18 for earnings quality.

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Wolfe found that New Fortress Energy, another company whose shares have fallen more than 33% year to date, could also be at risk since the company has one of the lowest earnings quality scores of all the energy stocks they track at just two out of five.

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In fact, according to FactSet, 80% of analysts covering New Fortress Energy give it a buy or overweight rating, as the company's shares are expected to rise an average of 88% from Wednesday's close, meaning that it has an 88% upside potential.

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Another name on this list, Albemarle, is a lithium manufacturer with a negative outlook. There are 4.6% short interests in Albemarle and a score of only 1 for earnings quality. On Tuesday, Albemarle announced that it was in the process of purchasing Liontown Resources, which has two lithium deposits in Australia. The offer, however, was quickly rejected as a result.

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It is estimated that Albemarle's shares will rise by 3.5% in 2023.

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Among other companies on the list of high-risk stocks, there is Lululemon Athletica, a company developing athleisure wear, Tesla Motors, a company that makes electric vehicles, and Catalent Pharmaceuticals.