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Beware of these stocks with low earnings quality that could blow up your portfolio

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Wolfe Research came up with its proprietary quarterly earnings quality score, which it said is an objective way to identify potential accounting-related risk.

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.

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 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.

 

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