Sell – The stock is priced at the time of publication of the report such that initiated a position or purchasing additional shares is not considered a good investment with more opportunity to go down in price based on the time table.
Hold – The stock in question is not worth buying additional shares of at the time of publication of the report however, it is likely better to hold the shares rather than sell as a better price to sell for either a minimal gain or less loss is foreseeable.
Neutral – This stock is at the time of publication of the report is thought to mimic the return of the market. There is little evidence to suggest it will do better or worse than its sector or a more broad market like the S&P500.
Underperform aka moderate sell or weak hold – The stock is at the time of publication of the report is not likely to match the average return of the market. Sometimes this is measured by the sector average or a more broad market like the S&P500
Outperform aka moderate buy – The stock is at the time of publication of the report is likely to match average return of the market and exceed it. Sometimes this is measured by the sector average or a more broad market like the S&P500
What are Analysts Ratings?
Any major stock you are researching or see on the front page of a major financial news website probably has buy, sell hold or initiated, reiterated, upgrade, downgrade associated with it. These are known as analysts ratings or reports and are supposed to help you as an investor make a better judgement on the investing potential of the stock in question at the given price and expected or target prices.
These can be very confusing and in all likelihood cause a lot of headache as you jump around different positions because different analysts upgrade or downgrade the stock in question. In short analysts recommendations cannot be taken as absolute and instead should just be used as a guide to give you some perspective on a given stock, perhaps providing the other side of a buy or sell argument.
Who are the big stock analysts and what stocks do they cover?
Stock analysts are most commonly employed by the brokerage houses and big name financial institutions of the world. Think of Credit Suisse, Barclays, and JP Morgan. These large financial houses offer their analyst recommendations as a side business to the buying and selling of securities. Generally speaking they have the credibility in the market that makes people listen when they make a recommendation. As you may have guessed this could lead to a conflict of interest.
These large institutions maintain coverage of the big name stocks such as GE, Apple or Ford. But what about most of the small caps and penny stocks? Generally speaking it is a popularity game. 99% of penny stocks are never covered and most small cap stocks have coverage by one or two small, boutique analysts if at all. Thus, stocks with the highest trading volumes month after month are the most likely to get attention from analysts, because it helps their customers who are already buying and selling the stock.
What’s in a stock ratings report? What do the signals mean?
Each financial institution and boutique analyst is different in how they do their research and market their reports. Some houses will do reports that are just a page or two long, briefly covering the basics while others will speak volumes on the stock, going 20 pages or more. And this is not limited to stocks but also exists for ETFs, derivatives, sectors, macroeconomic trends, bonds and even currencies.
The most common element of each report is the rating given to the stock or security in question. This is where it gets tricky. Each house has their own interpretation of language for what the stock is worth. The most common is buy, sell and hold. Within each of those, some analysts will even give, strong before the aforementioned stock.
Final Thoughts – No one considers stock reports canon, but we all talk like we do
You’ll hear the reports and the ratings quoted throughout the day as they become available and they will be repeated and repeated. Believe it or not, the market will often follow them as the average investor and even many professionals react with emotion to these.
Later we all dismiss them as fear mongering or wishful thinking, nevertheless many of us invest in concert with their predictions. The best advise I can give is to use them as a guide or as a devil’s advocate. Let them play the other side. For example if you are particularly bullish of a stock but the reports come out bearish, use those reports to think of reasons not to invest. Is there ample evidence to suggest you change your mind?
And most importantly, always take into consideration that ratings and reports are only relevant to their time of publication and the time horizon they choose to use.
I’m not saying they are correct for a certain time, I am saying that the authors of them have a certain window of time they are writing on, don’t make the mistake of assuming a rating of buy applies to a stock, when that rating was placed on it 2 weeks ago. A lot can and will change.