It is important for stock market investors to have a clear understanding of stocks ratings to be aware what they mean.
Different financial analysts use different wording in their ratings. While some ratings offer specific recommendations while others are usually general in nature. For example, one brokerage firm may sat that it expects a stock to appreciate by 10%-20% while another firm may say that it expects a certain stock to appreciate over the next 12 months.
Additionally, many analysts will provide a price target along with their ratings. This is the price they believe the stock will reach within a specific timeframe.
Basic classification of stocks ratings
Here is a look at financial analysts’ recommendations.
A. POSITIVE RATINGS
These are more bullish, so investors should add stocks with these recommendations. When you accumulate these stocks, they may overweight your portfolio. Analysts believe that the stock will perform better than the market.
STRONG BUY. Stock expected to outperform the market (market indexes) with estimated total return of 25% or more over the next 12 months. There is minimal risk to fundamentals.
BUY. Stock expected to outperform the market (market indexes) with estimated total return of 10%-20% over the next 12 months. There is moderate risk to fundamentals.
MODERATE BUY (Market/sector/peer outperform). Stock expected to outperform the market with estimated total return of 0%-10% over the next 12 months.
B. NEUTRAL RATING
When the rating is neutral investors should maintain their position. When you keep these stocks, they will be equal-weight your portfolio. Analysts believe that the stock will perform roughly the same as the market or its peers.
HOLD (Market/sector/peer perform). Stock expected to perform in line with the market over the next 12 months tracking market indexes. Estimated total return is in line with industry’s average.
C. NEGATIVE RATINGS
These are more bearish, so investors should reduce with these recommendations. When you weak hold these stocks, they may underweight your portfolio. Analysts believe that the stock will perform worse than the market.
MODERATE SELL (Market/sector/peer underperform). Stock expected to underperform the market with estimated negative total return of 0%-10% over the next 12 months.
SELL. Stock expected to underperform the market (market indexes) with estimated negative total return of 10%-20% over the next 12 months as a result of deteriorating fundamentals.
STRONG SELL. Stock expected to underperform the market (market indexes) with estimated negative total return of 25% or more over the next 12 months as a result of heavily deteriorating fundamentals.
NOTE: Negative ratings do not necessarily mean that the stocks will decrease in value. It just means that financial analysts do not believe that these stocks will increase in value as much as the overall market.
Understanding these classifications is a good starting point, but remember, analyst ratings are just one factor to consider when making investment decisions. It is vital to do your own research and consider your risk tolerance and investment goals.
