CIBC World Markets has introduced a new equities rating system to improve the effectiveness of its investment recommendations by comparing the expected return of a company’s stock against all other stocks within an analyst’s specific sector.

In the new system, WM analysts will rate how a stock is expected to perform, against all other stocks in the relevant sector, during the next 12 to 18 month period using one of three designations: sector out-performer, sector performer and sector under-performer.

Additionally, the analysts will assign a weighting to each sector covered, based upon the expected performance of the sector relative to the overall market. A “sector” will be defined as all the companies an analyst has under coverage, which may not correspond to what might typically be considered an “industry group.” In other words, an analyst may cover only a subset of the companies in an industry group, particularly in large industry groups such as pharmaceuticals or banks.

“By defining a sector as the analysts’ coverage universe, we hope at minimum to make clear to our clients which group of stocks we are benchmarking a given company’s expected performance against,” says John Parks, co-head of research at CIBC World Markets.

The new system is a departure from CIBC World Markets’ traditional four-tier model in which stocks were rated strong buy, buy, hold or under perform. Chris Kotowski, co-head of research, said this traditional system was “inherently limited.”

Along with the new three-tier grading, CIBC World Markets’ analysts will
also apply a new label of “speculative” for certain securities. This will not be a separate rating, but simply a flag for stocks that the analysts deem speculative. Such an assessment will be left to the analysts, but Parks says the speculative tag would generally be used for stocks with either a high beta, small market capitalization or high financial leverage.