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The rating game: Tracking analyst changes

What are we looking for?

Yesterday we looked at Canadian stocks with the biggest changes in average analyst rating in the past month. Today we're looking at the shares with the highest and lowest ratings.

Tracking investment recommendations as a sign of optimism and pessimism on specific stocks can provide insight into the outlook for companies and industries, and help investors decide what to buy and what to sell.

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The screen

We looked at common and preferred shares traded in Canada that are covered by at least five brokerages and have at least $5-million in average daily value traded.

Those minimum values help to avoid the least-followed, least-liquid shares that could be difficult to trade. From an initial universe of more than 3,500 stocks, our criteria narrowed down the list to 175.

We then used Bloomberg's equity-screening function to identify the shares with the 10 highest and the 10 lowest analyst ratings at the close of trading on Thursday.

More on the screen

Bloomberg tracks analysts' investment recommendations on a five-point scale, where "buy" and equivalents such as "outperform" or "overweight" are valued at five, "sell" and its equivalents are one, and "neutral" is three.

New ratings and reinstated ratings are also counted, so the scale isn't simply a measure of upgrades and downgrades. The Bloomberg database doesn't include all ratings.

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What did we find?

The highest-rated stocks have outperformed the lowest-rated ones in the past five trading days. Six of the top 10 have risen more than 5 per cent in that period, compared with only two among the lowest 10. Three of the top 10 have jumped more than 10 per cent, compared with only one in the bottom 10.

Yellow Media, the lowest-rated stock in our tables, is a special situation, and the shares have surged and plunged lately. The stock sank to 12.5 cents a month ago, so a mere 1 cent move in the price translated to a 7-per-cent swing up or down.

The case of Yellow Media also shows that analyst ratings can't be taken in isolation, and that investors need to consider many other factors when deciding what to buy or sell.

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