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Here are Macquarie Group Ltd’s conviction buys and sells this reporting season

The head-on collision between the global market meltdown and reporting season sets the stage for a stellar display of volatility over the coming weeks that is likely to throw up some compelling opportunities.

It’s a classic case of throwing the baby out with the bathwater! Get ready to play catch.

If you are wondering which ones you should be reaching out for and which to dodge, the analysts at Macquarie Group Ltd (ASX: MQG) have done the homework for you.

They have run stocks through a couple of filters and seven have popped out. The first filter is where their earnings estimates are significantly different from consensus.

The second filter is where they see consensus estimates converging on their forecasts. This means when Macquarie has above market estimates on a stock, other brokers have recently been upgrading their valuations, and vice-versa.

“We note that this approach is only focused on the earnings and where we think the consensus will converge to our own forecasts,” said the broker.

“Similarly, we are not only confining our window to FY18 forecasts because the result might, in fact, be the catalyst for earnings changes further out in the forecast window.”

Stocks with the strongest “long” or “buy” conviction based on their market upgrade potential during this month’s reporting season include mining services company Monadelphous Group Limited (ASX: MND), pipe and water solutions group Reliance Worldwide Corporation Ltd (ASX: RWC), building materials supplier Boral Limited (ASX: BLD), insurance broker AUB Group Ltd (ASX: AUB) and free-to-air (FTA) television operator Nine Entertainment Co Holdings Ltd (ASX: NEC).

It may surprise some to see Nine Entertainment on the list given how the commercial FTA sector has been so badly battered by the digital disruption.

But it’s the low expectations that could be its biggest advantage and Macquarie thinks it could deliver a better-than-expected first half result as its ratings and revenue share have been growing.

Further, its cost discipline, the stability in the FTA ad market and a growing digital business mean that Nine Entertainment’s earnings momentum may be sustained.

On the flipside, the broker thinks two stocks are at high risk of getting a consensus earnings downgrade this month.

The first is global property investment manager Cromwell Group (ASX: CMW) as it thinks the market is overestimating the financial benefit from Cromwell’s European REIT and underestimating the earnings risk from its lease expiry profile.

The other potential downgrade candidate is embattled department store Myer Holdings Ltd (ASX: MYR). While a lot of bad news have been flagged for the retailer, Myer is at risk of suffering another round of earnings downgrades.

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Motley Fool contributor Brendon Lau owns shares of Boral Limited and Macquarie Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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