One of the greatest strengths of the Robo-Analyst is its ability to scan the entire stock market for the biggest anomalies. Add in the ability to calculate a proven-superior measure of earnings, and I can generate insights that most firms can’t even dream of.
Today, I am featuring the companies that have the Most Overstated earnings in the S&P 500. In short, this report gives you one company with:
- The most overstated earnings and an Unattractive-or-worse Stock Rating.
As I put together my macro fundamental research for the 2Q24 earnings period, I see that once again Street earnings are distorted across the S&P 500. These results underscore the more stable nature of Core Earnings.
My firm’s research shows that there are a subset of S&P 500 companies with TTM 2Q24 Street Earnings that are lower than their true profits, i.e. Core Earnings. These companies are more profitable than investors realize and, in many cases, undervalued as well.
Street Earnings, as reflected in Zacks Earnings, are marketed as being adjusted to remove unusual income and charges. Core Earnings show Street Earnings fail to account for a material amount of unusual income and charges, which distorts investors’ view of profitability across the S&P 500. This report shows:
- the prevalence and magnitude of overstated Street Earnings in the S&P 500,
- that Street Earnings (and GAAP earnings) are flawed and not adjusted as promised, and
- the S&P 500 company with the most overstated Street Earnings and a Very Unattractive Stock Rating.
210 S&P 500 Companies Overstate EPS by More than 10%
For 369 companies in the S&P 500, or 74%, Street Earnings are higher than Core Earnings for the trailing-twelve-months (TTM) ended 2Q24. In the TTM ended 1Q24, 373 companies overstated their earnings. Core Earnings research is based on the latest audited financial data, which is the calendar 2Q24 10-Q in most cases. Price data as of 8/15/24. QoQ analysis is based on the change since last quarter.
When Street Earnings are higher than Core Earnings, they are overstated by an average of 19%, per Figure 1.
Figure 1: Street Earnings Overstated by 19% on Average in TTM Through 2Q24
Average overstated % is calculated as Street Distortion, which is the difference between Street Earnings and Core Earnings.
The 369 companies with overstated Street Earnings make up 66% of the market cap of the S&P 500 as of 8/15/24, which is down from 71% in the TTM through 5/16/24.
Note that this analysis is based on my firm’s team analyzing the financial statements and footnotes for ~3,000 10-Ks and 10-Qs filed with the SEC after earnings season.
Figure 2: Overstated Street Earnings as % of Market Cap: 2012 through 8/15/24
For over a third of the S&P 500 (210 companies), Street Earnings are overstated by more than 10% vs. Core Earnings. These 210 companies make up 27% of the market cap of the S&P 500 as of 8/15/24. See Figure 3.
Figure 3: Overstated Street Earnings by > 10% as % of Market Cap: 2012 through 8/15/24
The Worst Offender in the S&P 500
Figure 4 shows the S&P 500 stock with the most overstated Street Earnings (Street Distortion as a % of Street Earnings per share) over the TTM through 2Q24 and a very unattractive Stock Rating. “Street Distortion” equals the difference between Core Earnings per share and Street Earnings per share. Investors using Street Earnings miss the true profitability, or lack thereof, of these businesses.
Figure 4: S&P 500 Companies with Most Overstated Street Earnings: TTM 2Q24
*Measured as Street Distortion as a percent of Street EPS.
Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.