Analyst Ratings: Where Do They Come From?
Analyst ratings can either be incredibly reliable, or should be taken with a grain of salt. Such ratings are a measure of a stock’s predicted performance over a certain time period.
The ratings are usually issued four times a year, and are written by analysts at brokerage firms who provide ratings to traders. There are five types of ratings, and each one pertains to different investing decisions so it is helpful to understand them all.
Buy Rating
A buy rating means analysts believe a certain stock will increase in price in the mid-term, making it a worthy buy for investors. A strong buy rating can be induced by positive company earnings report, or information on new product drops.
Sell Rating
The opposite of a Buy Rating, a Sell rating indicates to investors that they should sell a certain stock as analysts predict it will fall below its current price. It is not common for analysts at major investment banks to place strong sell ratings on publicly traded companies, unless there is a real danger of the company losing profitability.
Hold
A Hold rating means that analysts predict a stock will continue its current progress of market-level performance. It is not a recommendation to buy more of a stock, nor to sell it. A Hold rating is usually brought on when there is uncertainty about a company’s direction, innovation or profitability.
Underperform
A rating of Underperform means analysts believe a certain stock will not do as well as others in its sector, and that will will return less than the market average. It is generally a recommendation to stay away from that stock. Stagnated growth or high margins could bring on this rating.
Outperform
This rating is assigned to stocks that are expected to produce higher returns than the market. It indicates that the stock is a very good buy, and the company may have released higher-than-predicted earnings or growth.
At the end of the day, all analyst ratings are just that: made by an analyst. The quality of research cannot always be confirmed, so while ratings are a helpful tool, individual investors should make sure to do their own research as well.
