Stock Analyst Sentiment in COVID-19

At the peak of the pandemic, analysts were extremely bearish on Canadian stocks - but have since changed direction dramatically

Ian Tam, CFA 28 August, 2020 | 1:05AM
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Choice - arrow on ground two directions

Institutional sell side analysts (also known as street analysts) in Canada are employed by large broker-dealers and are tasked to conduct in-depth research on companies. As a group, these analysts can provide valuable insights to investors, in that they can help gauge market sentiment on a company or a broad sector. Skilled analysts keep a sharp eye on a company’s earnings announcements and any other news flow (for example, a pandemic) that will affect their estimates of a stock’s fundamentals. 

Now that markets have mostly recovered, let’s have a look at what analysts think of Canadian sectors. To do this, I used Morningstar® CPMS™ to run an analysis on 380 Canadian-listed companies that are covered by at least three analysts. This table shows a handful of forward-looking analyst-driven metrics broken out by sector. Each column summarizes a measure by looking at all companies in a given sector (within the 380-stock universe) and shows the median figure (where half of the companies sit above and half below the figure displayed). 

Exhibit 1

To calculate the 90 Day EPS Estimate Revision, we first take the consensus estimate for a stock’s current fiscal year earnings as it appears today. We then compare that figure to what it was 90 days ago with the idea that at some point within those last 90 days, the company reported recent earnings, providing analysts with additional information to power their estimates. The intent here is to capture the change in estimates.

When the consensus estimate for a stock’s earnings moves upwards (or is positive), this is signal to investors that analysts are more bullish than they were 90 days ago. Over the last 90 days, the median estimate revision in the basic materials sector is 20.6% (very bullish), while the median estimate revision for technology companies is -4.3% (somewhat bearish). If we look at the whole universe of 380 stocks. the median revision is positive at 6.4%. This is a stark contrast to just a few short months ago:

Exhibit 2

The Bottom Line
As an investor it’s important to understand that analyst sentiment changes quickly and isn’t always right. A skilled analyst absorbs relevant market information like a sponge and when appropriate will update their financial models to arrive at new estimates. Looking at the last ten years of 90-day estimate revisions, we see that during the peak of the pandemic analysts were extremely bearish on Canadian stocks but have since changed direction dramatically.  

This article does not constitute financial advice. It is always recommended to speak with an advisor or investment professional before investing.   


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About Author

Ian Tam, CFA  is Investment Specialist at Morningstar Canada. 


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