Short these stocks with deteriorating earnings, Wolfe Research says

Published Tue, Apr 18 202310:10 AM EDTUpdated Tue, Apr 18 202310:23 AM EDT

Wolfe Research is recommending a basket of companies to short ahead of their quarterly earnings. Recent quarters have been a struggle for the firm in finding successful shorts, according to global macro analyst Rob Ginsberg. The Short Basket had notched previous notable success, and maintained an 80% hit rate through the second quarter of 2022, according to Ginsberg. Price progress has been more difficult the past nine months, though, given a more challenging macroeconomic environment. The "whipsaw, rangebound action has been frustrating for both bulls and bears," but Wolfe believes the approach outlined in its Wolfe Fusion Short Basket, which launched in 2018, has proven successful over a longer time horizon. "We have found that your odds of success on the short side can be greatly enhanced when your underlying bearish fundamental thesis is confirmed by three distinct macro investment disciplines —Accounting/Strategy, Quant and Technical," Ginsberg wrote. Wolfe drew on previous reports from its chief investment strategist Chris Senyek, looking for recent chief financial officer changes, which tend "to be a precursor for a future blow up," examining earnings quality and using natural language processing (NLP) to perform systematic mining of earnings calls (SMEC). The latter is to detect change in management demeanor and comments on earnings calls that could flag major business headwinds. "While no investment process is bulletproof, having this bearish confirmation from multiple research angles has been an effective strategy over the years," Ginsberg wrote. Here's a list of some of the companies that made the latest cut for the Wolfe Short Basket. C3.ai Inc. rode a wave of enthusiasm for artificial intelligence stocks earlier this year on the back of success for OpenAI's ChatGPT and Google's rival chat box, Bard. C3.ai has one of the worst earnings quality ratings on the Wolfe list, and the firm noted that anagement comments on calls with investors suggest it may be ripe for instability. The company is projected to next report quarterly results on May 31, according to FactSet. AI YTD mountain C3.ai has one of the worst earnings quality ratings on the Wolf Research list. Elsewhere, Hasbro also has one of the lower earnings quality ratings on the Wolfe scale, earnings just three out of 100. The company slashed 15% of its workforce in January after warning investors that weak holiday sales would drag down revenue. The Wolfe report showed a sequential earnings quality decline of more than 82%. The company is attempting to save as much as $300 million annually by the end of 2025. Hasbro will report quarterly earnings on April 27. HAS YTD mountain Hasbro has already had a weak start to 2023, and slashed 15% of its workforce in January. SunPower is on the Wolfe list, although the maker of solar energy generation systems had one of the higher Q4 earnings quality ratings (18) of the short candidates, up from 14 in the Q3 . The company has an average analyst rating of hold according to FactSet data, with a consensus price of $18. SunPower reports quarterly results on May 3. SPWR YTD mountain Although SunPower has a higher earnings quality rating on the Wolfe Research list, the company still has high short interest according to the report.