Top analyst sends message on pending ugly earnings miss (plus one big beat)
Top analyst sends message on pending ugly earnings miss (plus one big beat) originally appeared on TheStreet.
Wall Street always punishes bad performers when quarterly results come around, but it seems as though earnings misses are really bringing out the worst in investors this time around.
Just last week, the market action reinforced the idea that “good is not enough,” dropping Netflix by 5% last week despite the company raising its full-year guidance and beating its top and bottom lines.
Likewise, big banks like Bank of America and JPMorgan suffered through muted gains when solid earnings and positive consumer news couldn’t overcome the disappointment of not delivering even more.
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There’s a growing disconnect between the quality of performance a company delivers and Wall Street’s reaction to whether those numbers were enough. With the market back around record-high levels, strong results alone may not justify current levels.
The trend is not unexpected. Before earnings season heated up, Annex Wealth Management Chief Economist Brian Jacobsen noted in one of his regular “Market Musing” posts that valuation should give investors pause right now.
“Valuations are poor timing tools, but they do help gauge upside and downside risks,” Jacobsen wrote. “Considering where valuations are, as earnings season begins, it’s reasonable to expect that earnings misses could have a bigger market impact than positive surprises.”
With the stepped-up action around earnings season, the analysts at New Constructs dusted off a previously popular feature, looking at the companies that are most likely to miss earnings, as well as those that are poised for a big earnings beat.
Related: S&P 500 rally causes a big valuation problem
New Constructs’ methodology brings together discounted cash-flow analysis and forensic accounting, working backwards from most analysts by digging into a company’s documents and the footnotes level and working up, rather than starting at the top-line and conducting the analysis only at a skin-deep level.
As a result, New Constructs finds where the headline numbers mask a misleading situation. If that deception works in the favor of the investor, a stock is “attractive,” but if the numbers could mislead the investor into trouble, the stock is “dangerous.”
The firm’s stock-picking routinely has been rated by SumZero at or near the top of multiple investment categories; SumZero is a buy-side community in which more than 15,000 professional portfolio managers compete for rankings.
As Company President David Trainer noted, seeing that a company is poised for a beat or a miss doesn’t mean it will happen immediately or even the next time results are posted. He said, however, that without significant changes, the numbers make an earnings surprise nearly unavoidable.
Moreover, as New Constructs starts looking for the earnings surprises, Trainer said in an interview on the Money Life with Chuck Jaffe podcast that “Right now in the S&P, about 39% of companies are overstating their earnings by an average of around 14%.”
Trainer noted that earnings tend to be overstated more frequently when the market is rallying.
In the “Danger Zone” segment on the July 7 edition of Money Life, Trainer singled out Caesars Entertainment (CZR) as having “misleading street earnings” caused by “significant, unusual income” bloating its reported income levels.
Trainer said Caesars – which gets an “unattractive” rating from New Constructs in addition to being on the firm’s most-likely-to-miss list – combines high valuations with slim profit margins.
Related: Morgan Stanley resets S&P 500 target for 2026
New Constructs research showed estimated Street earnings per share for the second quarter at 19 cents, but noted that estimated core earnings per share for Caesars were 10 cents, meaning the Street estimate is inflated by 46%.
“For equity investors, we’re seeing a lot of a lot of risk here because you’ve got something like $26 billion in debt on a market cap of around $6 billion, with profits that are pretty razor thin,” Trainer said. “So it doesn’t take much to wipe out the equity holders.”
Trainer said that New Constructs pegs the “no-growth value” of Caesars at -$51 per share (yes, that’s negative 51 bucks per share).
“This is one unattractive, dangerous stock,” Trainer said. “They’re pumping up the earnings, and you take away those fake earnings and you’ve got a business that could be on life support with an earnings miss.”
In a follow-up Danger Zone interview on the July 13 episode of Money Life, Trainer looked at the other side of the coin, noting that more than half of the companies in the S&P 500 actually have understated Street earnings projections, with 30% of the S&P 500 earnings understated by more than 10%.
FactSet reported July 18 that analysts estimated earnings growth for S&P 500 companies had risen to 5.6% from an initial level of just under 5%, thanks to more companies reporting stronger-than-expected results.
The question is whether the earnings surprises will be enough to placate Wall Street.
Trainer made a pick of one company he thinks will make market sharpies happy, in Halliburton Co. (HAL) , where one-time and unusual expenses are dampening perception of the numbers.
“These are things [the company has] got to do once,” Trainer explained, “so they’re not really part of the ongoing profitability of the business. When these things go away, earnings will pop back up.”
With that, Trainer said he would expect the company to be trading much closer to its economic book value of “about 40 bucks a share,” a level that would nearly double the stock from its current pricing.
He noted that Halliburton’s valuation could be held down due to uncertainty over energy prices and to headline risks in the energy sector, “but there’s no reason a strong beat, a really strong beat here wouldn’t cause the stock to spike up. There’s clearly a lot of room for the stock to go up….You’re still looking at a business that looks very much undervalued to us.”
Top analyst sends message on pending ugly earnings miss (plus one big beat) first appeared on TheStreet on Jul 23, 2025
This story was originally reported by TheStreet on Jul 23, 2025, where it first appeared.
