Wolfe Research warned investors to avoid these low-quality stocks that could blow up. Using fourth-quarter corporate results, Wolfe Research identified potentially underperforming stocks using its earnings quality score, which considers several variables including sentiment, valuation metrics and various financial ratios. “With the Fed tightening, economic growth slowing, and recession risks rising, we expect a larger number of stock blow-ups over the coming quarters. Our work in this note focuses on the balance sheet and cash flow statement as leading indicators of potential earnings misses or other income statement issues,” Wolfe analysts led by Chris Senyek wrote Wednesday. The firm analyzed approximately 2,400 U.S. companies with market caps over $250 million. From this group, Wolfe Research found the names in the bottom 10% of its earnings quality score. Such stocks, on average, underperformed around 4% annually. Wolfe Research also identified names with high short interest relative to the company’s sector. Short selling a stock means that investors are betting it will fall in value. When investors short a stock, they first borrow shares and sell them at market price. If the stock price drops, the investor can buy back the shares at a lower cost and then profit from the difference. Short interest is a measure of how many shares of a given company are being shorted by investors. While high short interest means investors are pessimistic on the stock’s outlook, seasoned investors can also utilize the information to flip a profit. Take a look at 10 of the low-quality, high blow-up risk names on their list. Online dating company Match Group made Wolfe Research’s list of high-risk stocks. Shares of Match Group, whose portfolio of brands includes Tinder, have fallen 7.2% in 2023. The company has an earnings quality score of just 11. The research firm noted that Match Group is one of the companies with consistent earnings adjustments that increase GAAP, or generally accepted accounting principles, earnings by at least 20% for over nine out of the last 12 consecutive quarters. This is an additional negative sign for the stock, according to research, as consistent differences in GAAP and non-GAAP earnings could indicate lower likelihood of persistence of those earnings. Bumble, a rival dating company, also made the list, with an earnings quality score of 18. New Fortress Energy is another stock that could be at risk, according to Wolfe. The company’s shares have fallen more than 33% year to date. Wolfe also found the company has the lowest earnings quality score of all energy stocks tracked at just 2. To be sure, 80% of analysts covering the stock give it a buy or overweight rating, according to FactSet. The average price target on New Fortress Energy shares is around $53, implying 88% upside from Wednesday’s close. Lithium manufacturer Albemarle is another name on the list with a negative outlook. The company has a short interest of 4.6% and an earnings quality score of just 1. Albemarle announced on Tuesday a bid to acquire Liontown Resources, which holds two lithium deposits in Australia. However, the bid was quickly rejected. Shares of Albemarle are up 3.5% in 2023. Other names on the list of high-risk stocks include athleisure brand Lululemon Athletica , electric vehicle manufacturer Tesla, and pharmaceutical company Catalent . —CNBC’s Michael Bloom contributed to this report.
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