UBS warns that a historically reliable indicator shows earnings could fall 15% — and shares 24 high-quality stocks that will be immune from the drop
However, some companies won't be susceptible to the widespread decline.US corporate earnings may not be as solid as they appear, according to UBS. The firm recently warned that profits for companies across the S&P 50o, excluding the energy and financials sectors, could plunge 15%.
Normally, a company's earnings — what's left from revenue after subtracting all expenses — are closely tied to its money made from operations, or operating cash flow , Parker wrote. UBS calculated earnings risk through a formula that it calls the accrual factor, which is the gap between trailing earnings — or net income — and OCF relative to net assets. A low accrual suggests that a company's earnings are higher quality, while a high accrual implies lower quality earnings.In other words, if a company's earnings are elevated compared to the cash its core business produces, then its earnings may be unsustainably high and set to decline in the future.
"We combine the accruals factor with change in valuation and EPS revisions to identify stocks that have 'de-risked earnings' vs 'at-risk earnings,'" Parker wrote.
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