Avoid these potential earnings 'blow-ups', says Wolfe Research
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Some of the market's biggest stocks could be vulnerable to earnings disappointments, according to Wolfe Research. The institutional broker expects the stock market will continue to exhibit choppy trading in the face of an uncertain macroeconomic environment. "As a result, earnings disappointments may continue to cause a larger number of stock blow-ups, as we once again saw this past earnings season," chief investment strategist Chris Senyek wrote last Wednesday. Wolfe Research uses an Earnings Quality (EQ) score, a proprietary measure that factors in seven financial ratios, along with sentiment and valuation metrics. The gauge is scored on a zero to 100 scale, from lowest to highest. Wolfe's screen included companies with market values of at least $4 billion that fell into the bottom 20% in earnings quality relative to their business sector. The researcher flagged other potential warning signs: the departure of a chief financial officer, recent mergers and acquisitions, persistent use of non-GAAP earnings and potential undisclosed SEC investigations or inquiries, the latter based on the use of "so-called B7A exemption[s]." These are some of the stocks on Wolfe's potential earnings blow-up list. Yum Brands is on Wolfe's low-earnings-quality screen, with an EQ score of 10. Wolfe analysts highlighted M & A activity and a recent CFO change as other potential red flags. The warning comes as Yum's Taco Bell chain deals with the fallout from the cyclospora outbreak linked to shredded iceberg lettuce . Yum reported mixed second-quarter results and said the cyclospora outbreak linked to Taco Bell hit the chain's sales in July, but that trends began to improve. "Elevated uncertainty initially weighed on consumer demand, and since then, consumers have become increasingly aware that this is an industry-wide issue, not an issue specific to Taco Bell," CEO Chris Turner said in late July . Earnings at Nike are also termed low quality on Wolfe's screen, with an EQ score of 17. CFO change, an additional negative risk, was also highlighted. Earlier this month, JPMorgan downgraded Nike to underweight from neutral. Analyst Matthew Boss said Nike's "Win Now" turnaround plan is likely to weigh on financial results for the next few years. "A key clarification from our recent mgmt access ( & filings) — the financial impact of 'Win Now' decisions made through the end of calendar year 2026 will linger and impact NKE's [profit and loss] in 2H27 and into FY28," Boss wrote. As Nike reduced its U.S. store footprint by about 10%, the Oregon-based maker of athletic shoes will grapple with the financial impact until the closures are fully annualized, likely around July 2027, he said.. The quality of earnings at Chewy was also questioned, receiving an EQ score of just 2. Wolfe tagged the pet supply retailer for M & A activity, a CFO change earlier this year and the spread between GAAP and non-GAAP earnings. Chewy's non-GAAP earnings per share were a median 146% higher than GAAP earnings over the past 12 quarters, according to Wolfe Research. The warning comes ahead of Chewy's fiscal second-quarter earnings scheduled for release before the market opens on Wednesday, Sept. 9, and against a backdrop where Chewy is expanding beyond its core retail business. In April, Chewy announced plans to buy veterinary-clinic operator Modern Animal, a deal the Florida-based company expects will begin contributing to earnings in the first year after closing. Wolfe's screen also showed two megacap technology stocks — Amazon and Meta Platforms — with earnings quality scores of 5 each.