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Identifying Underperforming Stocks: Wolfe Research’s Analysis Reveals Potential Troubles in Investor Portfolios

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Stock Market Gains in 2023 May Be at Risk for Some Stocks, Says Wolfe Research

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Introduction

The stock market has experienced significant gains in 2023, despite concerns about the Federal Reserve’s policy direction. However, according to Wolfe Research, certain stocks may pose risks to investor portfolios. The firm warns that with stocks being priced for perfection amidst a slowing economy, there is a higher likelihood of earnings disappointments leading to stock blow-ups in the coming quarters.

Wolfe Research’s Proprietary Quarterly Earnings Quality Score

To identify potential accounting-related risks, Wolfe Research has developed a proprietary quarterly earnings quality (EQ) score. This objective system combines seven financial ratios, sentiment analysis, and valuation metrics to identify stocks that may underperform. The analysis covered over 2,000 companies, focusing on their second-quarter earnings reports, specifically their balance sheets and cash flow statements.

Stocks Ranking Low on Wolfe’s Screen

Based on Wolfe Research’s EQ score, several companies rank poorly and are considered high-risk stocks. These companies have an EQ score of less than 10, and Wolfe Research’s analysis shows that their low earnings quality basket has underperformed the S & P 500 by 800 basis points year to date. Historically, Wolfe’s screen has been effective in identifying “blow-ups” in the consumer, tech, industrial, and communication services sectors.

Communication Services Sector

In the communication services sector, two stocks with the lowest EQ score are Endeavor Group and The Trade Desk.

Consumer Names

Several consumer names also appear on the list, including Hasbro, Tesla, Wyndham Hotels, and Under Armour.

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