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Goldman Sachs has spotted what it thinks are the most worrisome stocks this earnings season.
Based on movements in the options market, software company Symantec, pharmaceutical company Mallinckrodt and LED light maker Cree are among the names that traders are most bearish on ahead of earnings, according to the bank's analyst Katherine Fogertey.
"We look for footprints left in the options market from large trades done ahead of earnings to gain insight on sentiment and positioning ahead of reports. In materials, tech and energy sectors, option investors are pricing in very high fear levels for a number of stocks," Fogertey said in a note to investors on Thursday.
Goldman Sachs looked at stocks where options imply that a bigger move is expected than their average historical reaction to earnings. They looked for options moves showing that investors are hedging against a violent move lower on results for those names.
Earnings, now in full swing, have been upbeat so far. Some big names including United Technologies and IBM also recently provided reassuring guidance for 2019. Fourth-quarter earnings are expected to be strong, with the Wall Street consensus seeing 14.7 percent growth. However, slower profit growth is on the horizon as the first-quarter earnings are expected to be up just 3.9 percent, according to Refinitiv.
The bearish positioning of the stocks in the options market also validates Goldman Sachs' fundamental views on the companies. The bank cited its low confidence in Mallinckrodt's near-term pipeline and Cree's risk from its end market exposure to Chinese telecommunications equipment maker Huawei.
The sentiment for the overall market remains positive as the hedges are targeted on individual companies, the bank said. The S&P 500 is up more than 5 percent in the new year on strong earnings and the developments on the China trade negotiations, recovering from its worst December since the Great Depression.
"Option investors are pricing in higher fears for many single stocks ahead of earnings, but less so for the S&P 500," Fogertey pointed out.