Understanding Stock Analyst Recommendations

A securities or stock analyst is a financial professional who studies companies and industries to analyze investment opportunities. Through their research, the analyst may provide one of a number of recommendations or ratings, including “strong buy”, “buy”, “neutral”, “sell”, and “strong sell”. The analyst will often be employed by a bank or another type of financial company to provide their recommendations to the company itself or to clients of the company.

Recommendations Offered by a Stock Analyst

While the specific labels the analysts use may vary among firms, the basic rating system includes the following:

Strong Buy is the rating offered when the analyst believes the stock will dramatically outperform the market and/or other stocks in its sector. This is the strongest recommendation an analyst can give in favor of acquiring a stock.

Buy is a rating to purchase the stock. While the analyst recommends acquiring the stock, it is a less enthusiastic recommendation that a strong buy. This rating is also known as “Outperform” and “Trading Buy”.

Neutral is given when the analyst recommends neither purchase nor sell because the evidence does not lead the analyst to believe that the value of the stock will either increase or decrease in the foreseeable future. This rating is also known as “Hold” or “Market Perform”.

Sell is a rating by the analyst to liquidate a particular stock based on the analyst’s belief that the price of the stock will soon decline. This rating is also known as “Underperform”.

Strong Sell is the rating offered when the analyst believes the stock will dramatically underperform the market and/or other stocks in its sector. A strong sell is the most negative comment an analyst can give with regard to the expected performance of a stock. This rating is also known as “Avoid”.

Should Investors Trust Analyst Recommendations?

While stock analysts do play a useful role as an information source, investors are discouraged from relying solely on this information in making their investment decisions. In many cases, conflicts of interest exist that may compromise an analysts objectivity in evaluating stock investment opportunities. For example, if the analysts firm is underwriting a company’s securities offering, the analyst may be more upbeat in making a recommendation than is truly warranted.

Investors are advised to understand the relationship between the analyst’s firm and the company under review and use the analyst’s report as a single data point in conducting their own research.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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