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Investment Ideas How analyst ratings can predict stock moves, Brookfield decoded, and betting on the golden years

An investment strategy modelled strictly on analyst stock ratings would be overwhelmingly bullish and would rarely sell anything.

But that’s not to say that sell-side research doesn’t have value.

A new report from S&P Global Market Intelligence attempts to strip away the pro-management bias inherent in equity recommendations.

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Rather than focusing on the recommendations themselves, the report suggests looking at changes in recommendations, which can foreshadow movements.

“It may simply be that analysts, as company and industry experts, can often identify early signs of improvement or deterioration,” the report’s author, Richard Tortoriello, wrote.

Analyst skill, however, can often be diluted by a system designed to generate favourable research.

Equity ratings can be influenced by the drive to support investment banking divisions, for example. Additionally, analysts criticizing a company can sometimes find themselves denied access to management.

“Analysts may issue biased recommendations to market a stock, appease management or avoid frustrating clients who hold shares, or they may simply lack skill,” Mr. Tortoriello said.

When analysts initiate coverage on a stock, they tend to start with a positive rating, or at worst, a hold, according to Brandon Osten, chief executive officer of Toronto-based Venator Capital Management. And rather than downgrade an underperforming stock, an analyst will often simply choose to drop coverage. They don’t typically stop following stocks they rate positively, on the other hand.

All of which contributes to a bullish bias in stock ratings.

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Read the rest of the story via this link. (for subscribers)

Tim Shufelt, Globe Investor reporter

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Stocks to ponder

Transat AT Inc. (TRZ-T). Shares of Transat have moved from about the $8 range to $11.54 at Thursday’s close. The catalyst has been several suitors seeking to acquire this enterprise, with Air Canada the leading option with a bid valued at $13 a share. The two companies are now in 30 days of exclusive talks. The Contra Guys explain why they are holding out for an even higher bid (for subscribers).

Booking Holdings Inc. (BKNG-Q). In an aging bull market, undervalued stocks are difficult, but not impossible to find. Take Booking Holdings Inc. – the largest online travel agency (OTA) in the world – for example. While that name may not be familiar to readers, you may have used one of their platforms in the past: Booking.com, Kayak, Priceline, Agoda, Rentalcars.com and OpenTable. The OTA industry is attractive because it benefits from two major secular trends that are likely to persist: rising global incomes and the migration of travel booking to online platforms. Read Michael McCloskey’s view.

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GDI Integrated Facility Services Inc. (GDI-T). This is a small-cap industrial stock that is on the positive breakouts list with the share price up 48 per cent year-to-date. This stock has been resilient during periods of market weakness. For instance, during the fourth quarter, while the S&P/TSX composite index was in a steep decline, this stock’s share price was relatively unchanged. Québec-based, GDI is a leading provider of janitorial services in North America. Jennifer Dowty reports (for subscribers).

CAE Inc. (CAE-T). CAE Inc. has a problem: Its shares have performed too well. The Montreal-based company, which trains pilots on its flight simulators in more than 35 countries, has seen its share price surge 38 per cent since the start of the year. The rally has pushed the stock’s valuation well above its historical range, raising some concerns about future performance. David Berman reports (for subscribers).

The Rundown

Why it’s time to bet on geezers (especially if you’re an income investor)

Make way for the geezer portfolio. Since the start of the year, there has been a notable bounce in the stocks of several Canadian companies linked to, um, the golden stage of life. Coincidence? Maybe. But the simultaneous jumps may reflect an outburst of interest in stocks that are insulated from geopolitics and possible recessions. The slow-motion aging of the Canadian population is the rare trend that investors can confidently project years into the future. Ian McGugan reports (for subscribers).

Prem Watsa: Modi’s victory reinforces bullish opportunity for investing in India

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One of Canada’s best-known investors says that Narendra Modi’s election victory in India reinforces the bullish opportunity for investing in the country. Prem Watsa, the chief executive officer of insurance conglomerate Fairfax Financial Holdings Ltd. and chairman of Fairfax India Holdings Corp., said in an interview that Mr. Modi’s second five-year term will continue to push India toward a business-friendly environment that will reward investors. “The next five years will be transformative,” Mr. Watsa said. David Berman reports.

RBC co-manager of $127-billion is bullish on U.S. stocks (less so on bonds and the TSX)

Portfolio manager Sarah Riopelle has some advice for investors worried about the ups and downs of the market: diversify and forget it – or, at the very least, look away. “My mantra is diversification,” says Ms. Riopelle, vice-president and senior portfolio manager at RBC Global Asset Management. “I fundamentally believe in taking a diversified approach in your investments, whether it’s asset classes, regional equity weights or different kinds of bond allocations. To achieve smooth and consistent results, the best option is diversification.” Brenda Bouw reports on her view on the markets right now (for subscribers).

The Brookfield spin-offs should continue to reward income investors handsomely. Here’s what you need to know about them

If you have not discovered the Brookfield Limited Partnerships yet, it’s about time you did. Most of these spin-offs from Brookfield Asset Management have provided handsome returns. Gordon Pape expects them to continue to do so. Each partnership specializes in a specific area of business, but they all share the same basic structure. They are all Bermuda-based, all are listed in both New York and Toronto, and the parent company retains an ownership stake in each. (For subscribers).

The week’s most oversold and overbought stocks on the TSX

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There are 36 S&P/TSX Composite benchmark members trading at technically attractive levels below the Relative Strength Index (RSI) buy signal this week. Topping the list are Canfor Corp., Magna International Inc., Peyto Exploration and Development Corp., Hudbay Minerals Inc., Norbord Inc. and SNC Lavalin Group Inc. There are a surprisingly large number (18) of overbought, technically vulnerable stocks this week given the falling index. Westjet Airlines Ltd., Hydro One Ltd., Alimentation Couche-Tard Inc. and Morneau Shepell Inc. are the most overbought stocks in the index. Scott Barlow reports (for subscribers).

Others (for subscribers)

Buying the dip: Telus, BMO feature on list of 30 low volatility stocks to invest in now

Utilities and REITs: Low beta, but not low risk

Here are 15 of Canada’s most profitable stocks

Ten defensive utilities sector companies gaining interest

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Friday’s Insider Report: Executive chairman sells over US$70-million worth of this dividend stock

Friday’s analyst upgrades and downgrades

Friday’s small-cap stocks to watch

Thursday’s Insider Report: CEO invests over $4-million in this beaten-down stock

Thursday’s analyst upgrades and downgrades

Globe Advisor

Growth in ‘smart beta’ ETFs appears to be slowing

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Ask Globe Investor

Question: In light of the U.S. Fed decision not to increase interest rates this year, and with the slowdown in the gradual shedding of mortgaged-backed securities and Treasury bonds it purchased during the financial crisis, would it not appear that the government and its agencies will do anything short of giving money away to keep the markets moving up. Here in Canada, the Liberals are certainly giving money away to the Millennials in the hope of getting re-elected. I have been holding too much money in my accounts thinking up until now that there would be a correction due to the quick recovery that has taken place since the beginning of January. I am 67 years old and must be diligent. What should I do?

Answer: No one can predict how the market will move in the short term. At your age, I think prudence should outweigh greed in making your investment decisions. Government pump-priming may help markets, but it is not the only factor at play. For example, if the trade talks fall through with China, I would expect a significant correction. Structure your portfolio in a way that makes you comfortable and then don’t worry about it.

Gordon Pape

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

What’s up in the days ahead

The US economy is slowing abruptly, with ripple effects sure to be felt in Canada. For investors, though, this matters less than one might think. There is surprisingly little relationship between growth rates and market returns. Ian McGugan will explain.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Gillian Livingston

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