Analyst Rating Guide

What are Analyst Ratings?

Analyst ratings are stock ratings given by specialists within banking or financial institutions. Stock ratings measure how specific stocks or industry sectors are expected to perform over a given time. Both analysts and brokerage firms use these ratings to advise recommendations to stock traders.Analysts usually rate stocks every quarter- four times a year. They base their ratings on the health of a company’s financial statements, the insight executives have on the company’s plans, and the feedback customers have on its product(s) or service(s).

How to Use Analyst Ratings

Here are four steps on how to interpret and apply stock ratings to make more profitable investments.

Step 1: Review rating history

Did the rating upgrade or downgrade? Understand why the rating changed compared to the previous rating.If the stock rating remained the same, but the target prices increased, look into what company goals and projects can drive the target price to increase.

Step 2: Observe how the public reacts to news

Typically, there will be news about the company, and it’s essential to keep up with it. But what’s more important is to observe how the public reacts to positive and negative news. Past trading behavior will help better predict how good or bad news will make the stock fluctuate. If you are a day trader, big jumps will matter most. However, if you are looking for long-term investments, less volatile stocks are preferable.

Step 3: Look at the big picture

A company’s stocks can also fluctuate on the news of its sector. Check how the stock of competitors is performing. Do they have similar ratings? This will help you determine if the industry worth investing in.

Step 4: Make a decision

After reviewing the analyst ratings and thesis of the company, decide to buy, sell or hold the stock. Of course, analyst ratings are not set in stone, but they are pretty good indicators of how the stock will perform.

Analyst Rating Accuracy

Analyst ratings should be used as a guide. They are estimated guesses made by professionals who spend their careers studying specific sectors. Because each financial analyst does their research, it’s no surprise that ratings vary across individuals. This is why the accuracy of analyst ratings cannot be measured. Nonetheless, analyst ratings are an excellent source that helps build your own trade ideas.

Where Analyst Ratings Come From

Analysts study a stock from top-to-bottom or from bottom to top. This means they can either study the sector first and work themselves down to the company or vice versa. To make a stock rating, an analyst takes into consideration all the sections below:

  • Past, current, and future economic trends in the industry
  • Company’s supply chain and health of suppliers
  • Customers satisfaction, feedback, and behavior
  • Competitor Analysis
  • Management quality
  • Business model
  • Review of financial statements (revenue, expenses assets, and liabilities)

Types of Stock Ratings

Although the stocks can be scaled one to five, they can also be rated with words such as “sell,” “buy,” “hold,” “equal weight,” and “outperform,” to name a few. Here are a few of the most common rating and trading terms and what they mean.

  • Buy:

    Recommends short and long-term traders to purchase the stock. If analysts are optimistic about the stock growth, they may even recommend it as a “strong buy.”

  • Sell:

    This means the stock will trend downward in a particular time frame. An analyst might even rate stock as a “strong sell” if they feel pretty confident of their prediction.

  • Hold:

    Suggests investors should not buy or sell the specified stock, not because they are unsure, but because the stock will not grow or decrease significantly in the near future.

  • Underperform:

    An analyst indicates that a stock is expected to perform below the market or sector average.

  • Outperform:

    An analyst expects a stock to perform better than its competitors.

  • Equal-Weight:

    The stock’s performance will tie to the average of all the stocks that an analyst covers in a particular sector.

  • Price Target:

    Analyst’s projection of a stock’s future price.