Declining Estimates Detect Portfolio Risks

 | Apr 03, 2013 | 9:00 AM EDT
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Nothing ruins the ride like a company that misses the consensus. Avoiding the blowups is the quarterly exercise we should be working on for our portfolios.

Each quarter I run a screen showing names whose quarterly EPS estimate has been revised down by 10% or more in the last couple weeks. This DEW (distant early warning) system is a great start for identifying the risks in your portfolio.

Declining estimates mean the analysts are detecting weakness in the pace of business, which could manifest itself in poor earnings and reduced guidance.

The table below shows who is looking weakest going into the preannouncement season this week and next. If you own any of these names, you need to think really hard about your long thesis.

A few observations were not surprising: minerals (metals and oil) have a number of weak names; no news there. Big cuts in oilfield services such as Aegion. Shouldn't Carnival (CCL) be cut even more after their second cruise ship debacle this season?

A lot of retailers are being cut, to be expected given the softening consumer sector. One surprising name was Toll Brothers (TOL) considering that housing is supposed to be booming at the moment. Of the cuts in financial names, some are shockingly large -- DFC Global (DLLR) was cut massively, as was Walter Investment Management (WAC).

As they say: buyer beware!

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