The stock market has mostly held onto its strong gains in 2023 even as concerns resurfaced over the Federal Reserve’s policy path, but some stocks could cause trouble in investor portfolios, according to Wolfe Research. “With stocks priced for perfection in the face of slowing economic conditions, we expect earnings disappointments to result in a larger number of stock blow-ups over the coming quarters,” strategists at Wolfe Research said in a note. The Wall Street firm came up with its proprietary quarterly earnings quality score, which it said is an objective way to identify potential accounting-related risk. The system uses seven financial ratios along with sentiment and valuation metrics to find potential underperforming stocks. Wolfe Research’s analysis covered more than 2,000 companies and focused on the balance sheets and cash flow statements in the companies’ second-quarter earnings reports. Here are some of the companies that rank the lowest on Wolfe’s screen (0 is the lowest score and 100 is the highest). The firm said its low earnings quality basket, which includes companies with an EQ score less than 10, has underperformed the S & P 500 by 800 basis points year to date. Wolfe added that its screen has worked best historically in identifying “blow-ups” in the consumer, tech, industrial and communication services sectors. Endeavor Group and The Trade Desk were two stocks with the lowest score in the communication services sector. Several consumer names also made the list, including Hasbro , Tesla, Wyndham Hotels & Resorts and Under Armour .
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