Wednesday, May 16, 2012

Analysts’ Recommendations and What They Mean

Do you find that analysts’ recommendations are confusing? It is not so bad when you realize that almost all analysts’ recommendation are on a 5 point scale.

Most places where you find a collection of analysts’ recommendations, they will be using a 5 point system, and they will make a consensus call based on what the majority of the stock analysts think, according to this scale.

Say, according to Morning Call, there are 9 analysts and 5 say a stock is a buy, 3 say a buy/hold and 1 say hold. You should consider this a buy. If you take the Morning Call ratings, you would give the buys 1 point for each analyst (or 5 points) and buy/hold 2 points for each analyst (or 6 points) and the hold 3 points for each analyst (or 3 points) for a total of 19 points. Divide by 9 to get 1.5, which is a buy.

The Globe & Mail rates stocks as Strong Buy (1), Buy (2), Hold (3), Underperform (4) and Sell (5). For the stock Genivar Inc. (TSX-GNV), see ratings at Globe Investor. The Financial Times uses Buy (1), Outperform (1), Buy (2), Hold (3), Underperform (4) and Sell (5). For the stock Ag Growth International Inc. (AFN:TOR), see ratings at their site.

Morning Call rates stocks as Buy (1), Buy/Hold (2), Hold (3), Hold/Sell (4) and Sell (5). See their recommendations at their site.

Possible ratings you will come across are:

1 2 3 4 5
Strong Buy Buy Hold Underperform Sell
Buy Buy/Hold Hold Hold/Sell Sell
Buy Overweight Hold Underweight Sell
Buy Buy/Hold Hold Weak Hold Sell
Action Buy Buy Hold Reduce Sell
Buy Outperform Hold Underperform Sell
Buy Outperform Market Perform Underperform Sell
Buy Outperform Sector Perform Underperform Sell
Strong Buy Moderate Buy Hold Moderate Sell Strong Sell
Top Pick Buy Hold Don’t Buy Sell

Got a Buy on Weakness or Watch recommendation? Generally this is because they think that the price is currently too high and it might go lower. Sometimes the “Don’t Buy” recommendation is meant as a Hold.

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