Bay Street analysts didn’t do a great job of picking last year’s winners. In fact, you would have been better off betting on the most-hated names.
Going into 2019, there were 10 stocks in the S&P/TSX Composite Index with unanimous support by equity analysts, meaning every single analyst following those companies rated them a buy.
Those stocks posted an average annual total return of 18.1 per cent last year. While that’s a solid absolute result, it trailed the S&P/TSX Composite Index by nearly five percentage points, after factoring in dividends.
More important, the top Canadian picks also underperformed stocks with the worst ratings. Those stocks recommended by fewer than one in five analysts posted an average total return of 21.6 per cent in 2019.
It all lends support to a contrarian investing approach, which counters prevailing investor sentiment by avoiding what is universally favoured.
The top picks that fared the worst last year all succumbed to sector-level strains that overwhelmed any operational and strategic advantages at the company level.
A year ago, bullish analyst recommendations abounded for Nuvista Energy Ltd., Enerflex Ltd. and NexGen Ltd.
But 2019 was an ugly year generally for smaller exploration and production companies (such as Nuvista), the oil field services sector (Enerflex) and uranium names (NexGen). Those three sell-side darlings each declined by between 20 per cent and 30 per cent, in a year when the S&P/TSX Composite Index returned almost 23 per cent.
Analysts were also optimistic about the turnaround efforts at Bombardier Inc., with 21 of 22 analysts rating the stock a buy at the end of 2018.
But it proved to be another rocky year for the beleaguered transportation giant, which suffered from delivery delays, rising costs, missed earnings estimates and allegations of corruption overseas. The stock declined by 5 per cent on the year, bringing its total slide from a 2018 peak to 65 per cent.
As for the cannabis space, few analysts were advising caution a year ago, let alone hinting at the brutal reckoning that was to come.
Of the dozens of ratings on the seven largest cannabis listings by market capitalization, more than 80 per cent of them were bullish. After the cannabis bubble popped, and investors abandoned the space, and companies struggled to raise money, the best performing stock in the group was Aphria Inc., which declined by 13.6 per cent last year. The biggest loser was CannTrust Holdings Inc., which saw its share price decline by 81.7 per cent after the company was caught growing cannabis in unlicensed greenhouse rooms.
The stocks that the Street hated the most going into 2019, on the other hand, did relatively well. There were 13 companies with the support of only 20 per cent of analysts or less. Eight of those stocks outperformed the S&P/TSX Composite. Just two of them declined on the year.
Two banks were among the stocks least expected to succeed. After a dismal 2018, Laurentian Bank of Canada had few champions. But the company made some progress in its prolonged transformation, and its shares saw a solid bounce in 2019.
Meanwhile, the consensus was also overwhelmingly bearish toward National Bank of Canada over an anticipated decline in loan growth and a relatively high valuation. But the bank’s home province of Quebec has seen an economic resurgence of late, which has helped drive revenues. National Bank shares returned 34.1 per cent last year as a result, trouncing the rest of the Big Six.
Some of the expected dogs of 2019 saw their years salvaged by buyout bids, including WestJet Airlines Ltd. and Hudson’s Bay Co.
Other names simply defied the skeptics. Extendicare Inc. has rebounded after its retreat from the U.S. market to focus on Ontario, while rising revenue and profitability won it investor support in 2019. A generous dividend yield of greater than 5 per cent also appealed to Canadian income investors. Extendicare’s shares rose by a whopping 40.9 per cent last year.
The pattern of darling stocks underperforming also holds when looking at a broader pool of Canadian equities. The 70 or so stocks with at least 80 per cent “buy” ratings going into 2019 returned an average of 22.5 per cent last year, while the 70 names at the bottom of the analyst rankings posted a 27.1-per-cent total return.
“Large amounts of money aren’t made by buying what everybody likes,” famous contrarian investor Howard Marks once wrote in his widely read newsletter. “They’re made by buying what everybody underestimates.”