Stock recommendation changes matter most

The percentage of buy recommendations on U.S. stocks has fallen dramatically in the past decade, but investors need not worry too much.

Analyst ratings have never been much good for predicting future returns anyways, says a new report from Pierre Lapointe, global macro strategist at Brockhouse Cooper.

“In fact, what matters more than recommendations is recommendation changes,” he said.

To his point, Mr. Lapointe notes that S&P Global 1200 stocks with the lowest recommendations have usually outperformed those with the highest ratings.

On average since 2000, the quartile with the most pessimistic outlooks increased 3.5% over a three month period, he said, while top-rated stocks advanced only 2.2%.

Meanwhile, over the same ten-year period, stocks with the most positive changes in recommendations outperformed those which saw their recommendations cut.

More specifically, he said the absolute return was +0.2% (non-annualized) in the immediate three months following the recommendation change.

“Investors should not be concerned that the percentage of buy recommendations has fallen to 28.9% in the U.S.,” he said.

“However, in some sectors, and in some countries, buying stocks that have seen their recommendation increase and selling those that had their recommendation cut would add value.”