Avoid these potential stock blow-ups in your portfolio, according to Wolfe Research

Published Sat, Aug 28 20218:45 AM EDT

Avoid these risky stocks in your portfolio, Wolfe Research warned investors in a note this week. The research firm analyzed second-quarter financial results to find potential underperforming stocks. Wolfe Research measures earnings quality using factors including cash flow, asset growth, tax rate and more. "Our quarterly earnings quality (EQ) score is an objective way to identify potential accounting related short ideas and as a risk tool to avoid potential blow-ups in the portfolio," the note said. The firm identified large cap companies — names with at least a $3 billion market cap — that appeared in the bottom 20% of its earnings quality score. From that pool analysts also found names with high short interest relative to the company's sector. "The combination of low earnings quality (EQ) and high short interest is our highest conviction cohort of stocks to avoid," the analysts said. In short selling, an investor bets that a stock will decrease in value. Therefore, the investor borrows shares and sells them at market price. If the stock price continues to decline, the short seller can buy the shares back at a lower cost and flip a profit. Short interest measures how many shares of a given company are being shorted by investors. The metric is a signal of market sentiment, with high short interest indicating a pessimistic outlook on the stock. Take a look at 10 names on their high conviction, blow-up risk list. Boston Beer Company is a risky stock, according to Wolfe Research's analysis. Shares of the brewery have been under pressure this year, down 41% in 2021. Cowen recently downgraded the stock, saying a downturn in the spiked seltzer category has expanded. Boston Beer Company also warned of a slowing seltzer market in its latest earnings call. Beyond Meat is among the stocks poised to underperform the market. Its shares are down nearly 15% in the past three months and 20% of its shares are being shorted. Argus downgraded the alternative meat company this week. The firm said Beyond Meat appears to be poised for disappointing results in the near term. AMD also makes Wolfe Research's list. Shares of the chip maker are outperforming the S & P 500 slightly this year, but some market participants are betting the stock will fall. OptionsPlay chief strategist Tony Zhang told CNBC's " Fast Money " earlier in August that he's betting the stock will fall by nearly 25% . Other stocks Wolfe Research identified as having a risk of blowing up include home furnisher RH , oil company Baker Hughes , and residential solar business Sunnova Energy . — CNBC's Michael Bloom contributed to this report.

In this photo illustration, packages of Beyond Meat "The Beyond Burger" sit on a table, June 13, 2019 in New York City.

Drew Angerer | Getty Images

Avoid these risky stocks in your portfolio, Wolfe Research warned investors in a note this week.