Two Albertans are charged by the ASC with securities fraud, while a study shows that equity analysts often get it wrong. The takeaway? Be careful out there
When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at email@example.com
by Max Fawcett
And while the news is an unfortunate reminder that people offering conspicuously generous returns on an investment are not to be trusted, or at the very least should be heavily scrutinized, scrutiny should also be applied to the recommendations made by more reputable sources. Roger Loh of Singapore Management University and René Stulz of Ohio State University studied the forecasts offered by analysts and their recommendations over the period 1983 to 2011, and discovered that they were frequently, even regularly, wrong.
More interesting, though, is the fact that their performance was even worse during falling markets – something that runs counter to the notion that it’s only the herd that panic sells during those periods. And as the Economist noted in a recent piece, that’s when investors tend to turn to experts the most. “Ironically enough, Messrs Loh and Stulz also found that investors pay more attention to analysts’ opinions when times are tough. Normally only one change in 10 in analysts’ stock recommendations moves the price of the share in question. But the proportion increases to one in seven in falling markets, even though there are more changes during market routs. Just as drivers value maps more when it is foggy, investors pay more heed to research during periods of increased uncertainty, reckons Mr Stulz. Unfortunately for them, that is also when their maps are most likely to be wrong.”
One company that analysts have been wrong about of late is Canadian Pacific (TSE:CP). Many thought the company’s shares were richly valued at $120, and even more so at $150. Well, they touched $170 today after a blowout quarter in which the company generated record profits wrapped up an equally impressive fiscal year. The company’s operating ratio on the year fell to 69.6 per cent, and management thinks it could reach 65 per cent in 2014. As the Globe and Mail reported today, analysts think investors could stand to share in the company’s success – even more than they already have by virtue of share appreciation. “Given CP’s improved profitability and cash flow, Mr. Chamoun [BMO Nesbitt Burns analyst Fadi Chamoun] said he expects higher shareholder distributions to come, likely in the form of share repurchases. National Bank Financial analyst Cameron Doerksen also believes CP’s board will consider raising the dividend or buying shares this year.”