Wolfe Research Recommends Shorting These Deteriorating Stocks

During the quarter, Wolfe Research recommends shorting a basket of companies.

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Global macro analyst Rob Ginsberg says the firm has struggled to find successful shorts in recent quarters.

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By the second quarter of 2022, Ginsberg reported an 80% hit rate for the Short Basket. Due to a more challenging macroeconomic environment, price progress has been more challenging in the past nine months.

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Both bulls and bears have been frustrated by the whipsaw, rangebound action, but Wolfe's Wolfe Fusion Short Basket, which was introduced in 2018, has proved successful over a longer time frame.

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“When three distinct macro investment disciplines - Accounting/Strategy, Quant, and Technical - confirm your fundamental bearish thesis, you will be much more likely to succeed on the short side,” Ginsberg noted.

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Based on previous reports by Wolfe's chief investment strategist Chris Senyek, Wolfe examined earnings quality, conducted systematic mining of earnings calls (SMEC), and looked for recent changes in chief financial officers, which are a precursor to a future blow-up. Detecting major business headwinds can be done by observing changes in management demeanor and comments during earnings calls.

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Despite the fact that no investment process is bulletproof, Ginsberg explained that multiple research angles' bearish confirmation over the years has been effective.

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In the Wolfe Short Basket, here are some of the companies that made the cut.

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• SunPower Corp

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• Pinterest Inc

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• C3.ai Inc

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• Hasbro Inc

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• Yeti Holdings Inc

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A wave of enthusiasm for artificial intelligence stocks swept through C3.ai Inc. earlier this year after OpenAI's ChatGPT and Google's Bard chat box proved successful.

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According to Wolfe, C3.ai has one of the worst earnings quality ratings, and management comments on investor calls suggest the company may be vulnerable to instability. According to FactSet, the company is expected to report quarterly results on May 31.

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On the Wolfe scale, Hasbro has also one of the lowest earnings quality ratings, with an earnings quality rating of just three out of 100. After warning investors that weak holiday sales would lower revenue, the company reduced its workforce by 15% in January. More than 82% of earnings quality declined sequentially, according to the Wolfe report.

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Up to $300 million will be saved by 2025, according to the company. A quarterly earnings report will be released by Hasbro on April 27.

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In Q4, SunPower had one of the highest earnings quality ratings (18) of the short candidates, compared to 14 in Q3. FactSet data shows an average analyst rating of hold for the company, with a consensus price of $18. The quarterly results of SunPower will be released on May 3.

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