As nice as it is to find stocks that are beating estimates and showing the type of fundamental excellence that lead to upgrades in our Portfolio Grader evaluation tool, it is equally important to avoid those that are being downgraded.
Companies that are missing analysts’ earnings estimates and seeing a decline in business conditions are going to be poor selections as the market advance continues to thin out. The big money that can move markets is focusing on companies with good fundamentals that are improving, and can be expected to sell those that disappoint.
Here are some examples of stocks to avoid right now as they head down after posting weaker-than-anticipated quarterly results.
Intuitive Surgical (ISRG) is one of the latest of the big names momentum stocks to show less than stellar earnings for the first quarter. The company posted results that were well short of analyst expectations for both revenues and profits in the quarter. The company earned just $1.13 a share, compared with $189 million, or $4.56 a share, in the same period a year ago.
Revenues fell by 24% and the company lowered its forecast for total procedures done by its robotic devices going forward. There had been some buying pressure in advance of earnings that moved the stock up to a C, or hold rating in the weeks before the report but Portfolio Grader quickly lowered the rating back to D after the poor report. The stock is a sell at the current price.
Internet travel and entertainment media concern Travelzoo (TZOO) also fell short of analyst expectations in the quarter. The company reported earnings of 31 cents per share compared to 36 cents per share in the prior-year period and revenues fell by 5% year over year.
Analysts had expected earnings of 36 cents per share and the stock has been selling off on the poor results. Portfolio Grader recognized the deterioration of the fundamentals and downgraded this stock last week to a D rating. The stock is a sell at the current price.
Analysts had expected information technology and services concern Unisys (UIS) to report a profit for the first quarter of the year of 41 cents per share. Instead the company posted a huge negative earnings surprise and reported a total loss per share of $1.15. Not only was it worse than analysts expected it was a much larger loss that they year ago period when the company posted a quarterly loss of 77 cents a share.
Meanwhile, revenues fell off 6.0% year over year to $761.7 million from $809.9 million in the prior-year quarter. The stock had been a hold ranking coming into the report but the disappointing results caused Portfolio Grader to downgrade the stock last week to a D. Shares of UIS are a sell at the current price.
To post market-beating returns it is not enough to own the best stocks that are beating the expectations of Wall Street and being upgraded by Portfolio Grader.
Investors also need to avoid those stocks that are being downgraded based on poor fundamental performance and likely to see lower stock prices in the future.