{"id":954,"date":"2022-07-25T17:12:56","date_gmt":"2022-07-25T17:12:56","guid":{"rendered":"https:\/\/www.wallstreetzen.com\/blog\/?p=954"},"modified":"2025-01-23T18:39:26","modified_gmt":"2025-01-23T18:39:26","slug":"analyst-stock-ratings","status":"publish","type":"post","link":"https:\/\/www.wallstreetzen.com\/blog\/analyst-stock-ratings\/","title":{"rendered":"How to Use Analyst Stock Ratings to Buy\/Hold\/Sell"},"content":{"rendered":"\n

You own a stock on which Richard Davis, an analyst at Canadian investment bank Canaccord Genuity, just marked a \u201cStrong Sell\u201d.<\/p>\n\n\n\n

What now?<\/p>\n\n\n\n

Should you sell the stock? Hold it? Buy more because it\u2019s now down 5% on the day?<\/p>\n\n\n\n

And who the heck is Richard Davis!?<\/p>\n\n\n\n

I\u2019m glad you asked\u2026<\/p>\n\n\n

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Are you looking for Wall Street\u2019s stocks with buy ratings? Click here to see today\u2019s \u201cStrong Buy\u201d stocks<\/strong><\/a>.<\/p>\n<\/div>\n <\/div>\n\n\n\n

Who are the stock analysts?<\/h2>\n\n\n\n

Richard Davis is a \u201csell-side analyst\u201d, which means he\u2019s a stock analyst who works at an investment bank and brokerage.<\/p>\n\n\n\n

If you\u2019ve ever seen an analyst interviewed on a financial news program, chances are it was a sell-side analyst. These analysts are expected to reach unbiased opinions based on proprietary research and modeling.<\/p>\n\n\n\n

The job of a sell-side analyst is to follow a list of companies, usually in the same industry, and provide regular research reports to the firm\u2019s clients. These research reports typically include a stock rating such as buy, sell, or hold.<\/p>\n\n\n\n

From the public\u2019s standpoint (you and I), the ultimate outcome of these reports is a set of financial estimates (usually in the form of quarterly earnings and revenue estimates), a price target, and a buy\/hold\/sell recommendation.<\/p>\n\n\n\n

The job of a sell-side analyst is primarily to provide institutional clients with timely and accurate information. If this is accomplished reliably, the analyst\u2019s firm will win more clients and generate more trading revenue.<\/p>\n\n\n\n

How do they perform their research?<\/h2>\n\n\n\n

Wall Street analysts analyze the financial statements, suppliers, customers, competitors, macroeconomic trends, and any other public information which pertains to a particular company.<\/p>\n\n\n\n

Some analysts even visit the headquarters of the companies they\u2019re researching and speak to management to get a first-hand perspective of the business (Peter Lynch was famous for this).<\/p>\n\n\n\n

After their fact-finding missions, an analyst will plug their data into proprietary models and use other valuation techniques to determine a company\u2019s fair value. Then, depending on the results of their calculations and the current stock price, the analyst will make a buy\/sell\/hold recommendation.<\/p>\n\n\n\n

If a stock is trading well below its fair value, the analyst will mark it as a \u201cStrong Buy\u201d. If a stock is trading slightly above its fair value, it may be deemed a \u201cSell\u201d.<\/p>\n\n\n\n

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What do stock analyst ratings really mean?<\/h2>\n\n\n\n

Different ratings scales with different terms are used by sell-side firms.<\/p>\n\n\n\n

Here is a chart including some of the most common ratings:<\/p>\n\n\n

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As you can see, a \u201cSELL\u201d at one firm may be marked as a \u201c5\u201d or \u201cStrong Sell\u201d at another. Similarly, \u201cOUTPERFORM\u201d and \u201cOverweight\u201d represent the same level of bullishness.<\/p>\n\n\n\n

Fortunately, these classifications are self-explanatory.<\/p>\n\n\n\n

Why should you trust stock analyst ratings (or not trust them)?<\/h2>\n\n\n\n

Let\u2019s look at a couple of examples of some very popular stocks and some associated ratings.<\/p>\n\n\n\n

Should you sell a stock if it has a \u201cSell\u201d rating?<\/strong><\/h4>\n\n\n\n

Apple:<\/strong> In the Spring of 1998, a Bear Stearns analyst downgraded Apple stock (NASDAQ: AAPL<\/strong><\/a>) to \u201cSell\u201d.<\/p>\n\n\n\n

Following the report, AAPL<\/a> rose from $0.29 to a high of $1.12 on March 30, 2000.<\/p>\n\n\n\n

The analyst was wrong about the stock.<\/p>\n\n\n\n

Should you buy the stocks with buy ratings?<\/strong><\/h4>\n\n\n\n

Coca-Cola:<\/strong> On March 4, 2010, UBS upgraded Coke (NYSE: KO<\/strong><\/a>) from \u201cNeutral\u201d to \u201cBuy\u201d.<\/p>\n\n\n\n

From July 30 to December 30 of that year, KO<\/a> rose from $17.39 to $32.75, an increase of 88%. UBS nailed it.<\/p>\n\n\n\n

Starbucks:<\/strong> In December of 2006, UBS upgraded Starbucks (NASDAQ: SBUX<\/strong><\/a>) from \u201cNeutral\u201d to \u201cBuy\u201d.<\/p>\n\n\n\n

SBUX<\/a> plummeted from $18.88 to a low of $4.73 in 2 years, a nearly 75% drop. The analyst missed the mark.<\/p>\n\n\n\n

How should you use stock recommendations?<\/strong><\/h4>\n\n\n\n

As seen in the examples above, analysts can be right or completely wrong about a stock.<\/p>\n\n\n\n

Does that mean we shouldn\u2019t listen to their opinions and read their reports? Absolutely not.<\/p>\n\n\n\n

Don\u2019t forget: These are professional stock analysts who are paid quite well to perform stock analysis and write research reports. If they weren\u2019t good at their jobs, they wouldn\u2019t have them for long.<\/p>\n\n\n\n

As you know, stocks are incredibly hard to predict (how to predict stock prices<\/a>). This is the case even for professionals.<\/p>\n\n\n\n

So here\u2019s how we should use analyst stock ratings: <\/strong>As well-researched, sophisticatedly-analyzed best guesses, completed by very smart (and highly paid) professionals.<\/p>\n\n\n\n

The problem with analyst stock ratings<\/h2>\n\n\n\n

The problem with analyst stock ratings is we don\u2019t know which ratings to pay attention to and which ones to ignore.<\/p>\n\n\n\n

Going back to my original example, should you sell your stock that Richard Davis marked as a \u201cStrong Sell\u201d?<\/p>\n\n\n\n

Before you answer that, what if I told you Richard Davis<\/a> has been right 65 out of his last 74 ratings (88%), with an average return of 51.94%?<\/p>\n\n\n\n

\"stock<\/a><\/figure>\n\n\n\n

It may not be a bad idea to listen to him.<\/p>\n\n\n\n

But how do we know how analysts are performing when all we see are notifications like this:<\/p>\n\n\n

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Should we be buying NTRA?<\/p>\n\n\n\n

Who is Kyle Mikson? (You can scroll to the bottom to find out.)<\/p>\n\n\n\n

We either blindly follow the recommendation or we ignore it, right?<\/p>\n\n\n\n

Not anymore.<\/p>\n\n\n\n

Why WallStreetZen built Top Analysts<\/h2>\n\n\n\n

WallStreetZen<\/a> tracks historical analyst recommendations and identifies top-performing analysts, so you can get stock ideas and forecasts from proven performers.<\/p>\n\n\n\n

We rank nearly 4,000 sell-side analysts<\/a> based on average return, win rate, and frequency of picks:<\/p>\n\n\n

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\"stock<\/a><\/figure><\/div>\n\n\n


What does that mean for you?<\/p>\n\n\n\n

You no longer need to blindly follow or ignore analyst buy, sell, hold recommendations.<\/p>\n\n\n\n

A lot of tools may give you access to analyst ratings but, without the accompanying performance data, what good are those ratings?<\/p>\n\n\n\n

With our Top Analysts, you can find the best investments recommended by the best analysts in no-time flat.<\/p>\n\n\n\n