The knock against Canadian equity analysts may be a lot like the one against our nation in general: Maybe they're too nice.
Research from Brockhouse Cooper global macro strategist Pierre Lapointe and financial economist Alex Bellefleur found that Canada's analysts are among the most bullish in the world with their stock recommendations. Canada ranks eighth among 29 countries on the S&P Global 1200 stock index in terms of their average stock rating.
Whether this indicates that Canadian analysts are too generous with their recommendations, or that we're in a market that has a lot of upwardly mobile stocks to recommend, is hard to say. But that debate may be academic; the recommendations may be of little use at all, except to the contrarian investor.
Degrees of bullishness
Mr. Lapointe and Mr. Bellefleur believe the differences from country to country may have more to do with tougher regulations on stock analysis in some countries over others. They noted that the stricter stock-rating rules in the U.S., following the dot-com-era scandals, have substantially reduced the percentage of "buy" recommendations - from 75 per cent a decade ago to less than 30 per cent today. While the economic and market downturn starting in 2008 may have been a significant factor, the "buy" recommendations had already dropped to about 50 per cent by the middle of the decade.
Regardless, they note that analysts in all 29 countries in the S&P 1200 still have a tendency to be bullish - every country's average recommendation is above 3, the ratings midpoint that represents "hold" or neutral rating.
While this suggests that the world's stock-rating scale is inconsistent and, in many cases, seriously skewed, one would think you could still make it useful - sort of like knowing that your local movie critic never gives any film less than two stars, but you can still expect anything over four stars to be worth seeing. You could still look at the relative ratings to distinguish which stocks look like the best bets.
That approach would be fruitful. But not at all in the way you'd expect.
Mr. Lapointe and Mr. Bellefleur found that S&P 1200 stocks in the lowest quartile of average recommendations actually outperformed those in the highest quartile over a three-month period. This holds not only for the global index as a whole, but for each of the 10 major industry sectors within the index, over a 10-year period.
The findings suggests that the best way to play stock recommendations might be as a contrarian. The stocks set to rise most might not be the ones the Street is highest on - but, in fact, the ones the analysts are most down on.