Earnings are in full swing and stocks are reacting as they typically do to the good news, the bad and the mixed. But beware of the stocks that could really come under pressure on any whiff of bad news.
According to AB Bernstein, so-called crowded stocks tend to react very negatively to bad results. As widely traded stocks are usually priced for perfection, they are more vulnerable to surprises. Investors should brace for violent reactions when anything disappointing occurs, especially to those crowded names with high earnings expectations.
“One of the characteristics of crowded companies is a negative skew in reaction to news as measured by earnings revisions or surprise. The stocks don’t react much to incremental positive news, while negative news has a much more pronounced effect,” Berstein’s Ann Larson said in a note on Tuesday.
The other key ingredient, according to Bernstein, is finding companies with high expectations, making them that much more vulnerable to a disappointment. Companies in the Bernstein screen are all expected to show profit growth of at least 10 percent.
Earnings season kicked off this week as investors digest first batch of numbers coming out of a slew of big banks. 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.
Technology continues to be the most crowded sector in the S&P 500, followed by healthcare and utilities, according to Bernstein. On the industry level, household and personal products as well as healthcare equipment and services are most crowded in the S&P 500.
— With reporting by Michael Bloom