Wolfe Research recently highlighted that some companies reporting earnings next week might not meet expectations. A significant lineup of around 90 companies from the S&P 500, including eight from the Dow Jones Industrial Average, are gearing up to present their latest quarterly results. Among the most anticipated are four from the “Magnificent Seven,” with Meta Platforms in the mix, alongside other heavyweight names like Intel, Boeing, Caterpillar, and Starbucks. However, there’s a possibility that some might experience significant earnings surprises, potentially turning them into attractive short targets. Wolfe Research has pinpointed stocks that fall in the bottom 20% concerning earnings quality in relation to their sector, measuring them on a scale from zero to 100 based on various valuation and sentiment metrics. Simply put, a lower earnings quality score hints at possible disappointments and a sharp decline after earnings announcements.
For example, Southwest Airlines is on this list, poised to release its earnings on January 30. The airline has an earnings quality score of just 16 and has only managed a 7% gain over the last year, falling behind the S&P 500’s performance during the same period. Bank of America took a critical stance by downgrading the airline’s stock from neutral to underperform. Analyst Andrew Didora pointed out that the stock is trading near the upper boundary of its historical valuation range. He noted, “We downgrade the shares to Underperform from Neutral, as this valuation level does not adequately account for the industry changes that have occurred post-pandemic (shift to more premium, corporate, and international) and the cost/capex risk associated with LUV’s business model changes such as assigned and premium seating.”
Another name raised as a concern is Tesla, an iconic member of the Magnificent Seven, with an earnings quality score of 19. Slated to report earnings on January 29, Tesla was recently downgraded by Bank of America from buy to neutral, albeit with an increased price target from $400 to $490, hinting at a potential 16% rise. Analyst John Murphy commented, “While this still implies upside, execution risk is high and TSLA is trading at a level that captures much of our base case LT potential from core autos, robotaxi, Optimus, and energy generation & storage.” It’s worth noting that despite these concerns, Tesla’s stock has soared 102% over the past 12 months.
Western Digital and AbbVie are also on Wolfe Research’s list of potential underperformers that are set to report earnings in the upcoming week.
