Avoid these stocks that saw ‘double misses’ this earnings season, Wolfe Research warns

Despite a robust Q2 earnings season where the majority of S&P 500 companies exceeded expectations, Wolfe Research and other investment firms are identifying specific stocks as potential sells due to missed revenue and earnings, coupled with negative future guidance and analyst downgrades. Notable examples include Southwest Airlines, Align Technology, and Lockheed Martin, all of which reported Q2 results below consensus and face concerns regarding their growth trajectories, execution, and valuations, signaling fundamental headwinds contrary to the broader market's positive performance.

Analysis

Despite a broadly positive Q2 earnings season, where 82% of S&P 500 companies surpassed earnings expectations, specific firms are being flagged for underperformance based on a combination of missed quarterly results and deteriorating future outlooks. Wolfe Research identified a cohort of stocks that missed on both revenue and earnings and also carry negative earnings revisions for 2025. Southwest Airlines (LUV) exemplifies this, reporting Q2 adjusted EPS of 43 cents versus a 51-cent consensus and revenue of $7.24 billion against a $7.30 billion estimate, prompting a downgrade from Evercore ISI due to valuation concerns at 36x 2025 estimated EPS. Align Technology (ALGN) faces a more severe outlook, having missed Q2 estimates and issued current-quarter revenue guidance ($965M-$985M) significantly below the $1.04 billion analyst consensus, leading Morgan Stanley to downgrade the stock and slash its price target from $249 to $154, citing prolonged growth challenges. Similarly, Lockheed Martin (LMT) was downgraded by Truist to hold from buy after its Q2 revenue fell short and it lowered its full-year guidance; the analyst expressed a "lack of confidence that management will be able to execute" and warned of potential future charges, projecting flat share performance.

Key Decisions for Investors

• Investors should scrutinize portfolios for companies that missed on both Q2 revenue and earnings, as these names are being isolated as underperformers despite a strong broader market.
• Caution is warranted for Align Technology and Lockheed Martin, given that significant guidance cuts and analyst downgrades are explicitly tied to a loss of confidence in management's execution and forward visibility.
• For Southwest Airlines, investors should weigh the recent earnings disappointment and valuation concerns against the analyst price target that still implies 28% upside, suggesting a re-evaluation of the position is needed.
• Monitor for further negative earnings revisions for 2025 across these specific stocks, as this was a key screening criterion for identifying potential sell candidates.