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ViacomCBS meets the criteria for stocks that could see a significant dip the day after earnings are released.
Bloomberg/Tiffany Hagler-Geard
This week marked the start of the second-quarter earnings season, with huge banks leading the push. Even with a growing economy and many companies at or near all-time highs, investors face hazards. One such risk is earnings blowups, which occur when a stock’s price decreases drastically the day after it reports earnings. After posting better-than-expected first-quarter earnings in April, the stock of electric vehicle pioneer Tesla (ticker: TSLA) plummeted roughly 4.5 percent. The issue was that earnings were boosted in part by a one-time gain on the company’s Bitcoin holdings.
Investors should avoid companies with lower-than-average earnings quality indicators or earnings that are enhanced by causes other than advances in the core business to avoid these circumstances. Companies with poor earnings quality indicators aren’t necessarily attempting to deceive the public. Earnings reports, on the other hand, are all about expectations, and a low earnings quality can be a red flag. Chris Senyek, a Wolfe Research accounting and tax policy expert, grades corporations on a scale of 0 to 100 based on their earnings quality and compares them within sectors. A poor earnings score can be caused by a number of things. Noncash charges, which include one-time profits, frequently do not repeat, skewing a quarter’s results. Working capital, which includes items like inventory, can lead to a disconnect between earnings and cash flow. Other accounting concerns that can lead to a poorer quality score include lower-than-expected tax rates and one-time adjustments. Senyek’s scores are based on a variety of additional elements. He has identified ten firms that have had a CFO change or recent M&A, both of which might result in unanticipated earnings volatility and inferior earnings quality compared to peers. Installation contractor is on his list of ten stocks to avoid this quarter.
Products that have been installed in buildings
(IBP) is a contact lens manufacturer.
Cooper Enterprises
(Chief Operating Officer), a healthcare firm
Premier
(PINC), a defense contractor
Systems Using Mercury
(MRCY),
Equifax
(EFX), a manufacturer of industrial components
Rexnord
(RNX), a software company
Coupa Software is a software company based in the United States
(COUP),
Xerox
T-Mobile US (TMUS), and XRX
Lululemon
(LULU). Senyek also advises investors to stay away from companies with low earnings quality and significant short interest, which refers to the amount of shares borrowed and sold short by pessimistic investors betting on price falls as a percentage of the total amount of stock available for trade. Bearish investors expect something negative to happen to the company, and earnings are usually the spark. Large equities that meet his criterion of worse earnings quality and larger short interest compared to their peer group are his favorites.
Dish Network is a satellite television provider.
(DISH),
ViacomCBS
(VIAC),
Sirus XM is a satellite radio station broadcasting in the United States
(SIRI),
Carvana
(CVNA),
Restoration Hardware is a company that specializes in the
(RH),
Expedia
(EXPE),
Wayfair
(W),
Boston Beer is brewed in Boston, Massachusetts.
(SAM),
Kellogg
(K),
Baker Hughes is a fictional character created by Baker Hughes
(BKR),
BioMarin Pharmaceuticals is a pharmaceutical company based in the United
(BMRN),
Lyft
(LYFT), a software company
RingCentral
(RNG) and a decking firm for the home
Trex
(TREX). This group’s average short interest rate is around 11 percent. This is around five times the average short-term interest rate.
S&P 500 Index
stocks. While there’s no assurance that stock prices will fall on the day these firms release earnings, Senyek says the risk of an earnings surprise is high. With these two dozen stocks, investors should look past the headline earnings data. To contact the editors at Barron’s, send an email to editors@barrons.com./n
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