Investors would do well to steer clear of certain stocks this earnings season, Wolfe Research’s Chris Senyek cautioned in a recent report. So far, about 10% of companies in the S & P 500 have reported earnings for the December quarter. Investors have good reason to be optimistic, since 62% of those have posted a positive earnings surprise. The same number have also reported a positive revenue surprise, according to data from FactSet. But since not all companies will top analyst expectations, and since positive earnings results are key to pushing up a stock’s price, it’s vital that investors avoid those that are likely to underperform. With fourth quarter earnings season in full swing, Wolfe Research released a list of potential stocks that are best left alone. The companies fall into the bottom 20% of their sector earnings quality and are likely to underperform in 2024, according to Wolfe. The companies are scored in a range of 0 to 100, with 0 being the worst possible score. Here are a few of the stocks that made Wolfe’s list. Tesla , one of the so-called “Magnificent 7” stocks that helped drive the market higher last year, was nonetheless one of the weakest stocks in Wolfe’s screen, receiving an earnings quality rating of 0. The company’s average earnings quality score for the trailing four quarters came in at 5. Notably, Tesla missed both its earnings and revenue estimates in the third quarter of 2023 . CEO Elon Musk told investors that the company’s new Cybertruck is not likely to contribute significant cash flow in the near term. The electric vehicle company is scheduled to post fourth-quarter results on January 24. Analysts surveyed by FactSet expect earnings of 73 cents per share on revenue of $25.6 billion. Shares of Tesla have already slumped 16% this year, after soaring 102% in 2023. TSLA YTD mountain TSLA YTD chart With an earnings quality score of 11, pet supply company Chewy also made the list. The stock is down more than 16% in 2024, hurt in the past two weeks by Argos Holdings selling 12.3 million shares and by Goldman Sachs cutting its price target. However, earlier this month Barclays upgraded the stock, saying that its “dog days are over.” “We think growth inflects in F2H24, and we see upside to consensus in FY25, with incremental upside optionality from vet clinics, int’l and ads,” wrote analyst Trevor Young. Chewy is scheduled to report its earnings for the fourth quarter ending Jan. 31 in late March. Its average earnings quality score for the trailing four quarters amounted to 25. PayPal was also included in Wolfe’s basket of companies that may miss estimates. The payments platform earned an earnings quality score of 10 and an average score in the trailing four quarters of 30. Indeed, Wall Street consensus hints that trouble may be brewing for Paypal. Earlier this month, PayPal was downgraded by several firms, including Mizuho , Morgan Stanley , BTIG and Oppenheimer . “A mix from branded to unbranded volumes is impacting their ability to stabilize [gross profit] margins and thus operating margins outside of expense cuts,” wrote Oppenheimer analyst Dominick Gabriele. “As expenses continue to get cut, PYPL could fall behind peers in innovation. It will likely take multiple years for PYPL’s profitability to stabilize.” Despite these downgrades, shares of PayPal have still managed to rise nearly 6% this year after dropping 14% in 2023. Other notable names on Wolfe’s list to avoid include burger chain Shake Shack and e-commerce seller Etsy . — CNBC’s Michael Bloom contributed to this report.
