Analyst Ratings Screener

Understanding the Ratings Used by Analysts

The three most commonly ratings used by analysts are buy, hold, and sell. While the names sound straightforward, they can be misleading and require context that can be gleaned from understanding what the same analyst has written regarding other stocks:

• Buy Rating: Conventionally, this means that the analyst is making a recommendation for investors to buy this stock or security. However, in some cases, a buy rating simply expresses an analyst’s opinion that the stock is likely to outperform the broader market. That means, when stocks are going up, investors can expect stocks with a “buy” or “strong buy” rating to move higher than the market average. And when stocks are going down, these stocks may still decline, but the performance of these stocks will be “less bad” than the broader market.
• Sell Rating: Like a buy rating, the sell rating conventionally means that an analyst is making a recommendation for investors to sell or liquidate their position in a stock or security. But again, sometimes this is only an expression of how the stock is likely to perform. In other words, in bear markets, this stock will decline more than the market average and in a bull market it may underperform the market.
• Hold Rating: This is sometimes referred to as a “Neutral” rating. When an analyst gives this rating, they are not calling for the investor to take a specific buy or sell action; rather they are giving their opinion on the performance of the stock. In this case, they are projecting that the stock will perform in a way that is consistent with the overall performance of the market and/or comparable companies within that sector or with a similar market capitalization.

Because of the potential for confusion created with only three ratings, many analysts have adopted additional categories that make their intention clear.

• Underperform Rating: Like the “hold” rating, this is a rating that refers to the projected performance of the stock. In the case of underperform it means that the stock is projected to perform below the market or sector average. Depending on the analyst words like “moderate sell”, “weak hold”, or “underweight” may be used to mean the same thing.
• Outperform Rating: In contrast to an “underperform” rating, securities that receive an “outperform” are expected to outperform the market or sector average. Once again, depending on the analyst, different terms may be used such as “moderate buy”, “accumulate”, or “overweight”.

When in doubt, investors should go to the website for the company issuing the rating. This will usually give them the specific meaning behind the rating that is issued. For example, Raymond James provides the following definitions for its equity research on its website:

Strong Buy - Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months.

Outperform (MO2): Expected to appreciate and outperform the S&P 500 over the next 12 to 18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12 to 18 months.

Market Perform (MP3): Expected to perform generally in line with the S&P 500 over the next 12 months and could potentially be used as a source of funds for more highly rated securities.

Underperform (MU4): Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold.

Suspended (S): The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon.

Limitations of Analyst Ratings

• The Ratings are Subjective – Although the data used to form a rating is objective, an analyst’s rating can’t be purely objective. Anybody who’s bet on sports or played fantasy sports understands that the “experts” frequently get things wrong.
• Perception Can Shape Reality – There are some analyst firms that have a positive or negative reputation that can cause investment outlets and financial media to place an outsized amount of credibility to that rating.
• They Reflect a Moment in Time – An analyst rating expresses their opinion about the stock’s fortune at a moment in time. Many analysts revisit their ratings several times a year, usually around a company’s earnings report.
• Misreading the Analyst’s Comments – As we mentioned above, a “Sell” rating doesn’t necessarily mean that investors should sell (or short) the stock, especially long-term investors. But that’s how many investors interpret it which can cause a stock to fall below its intrinsic value.