If you’ve been reading equities research reports from stock brokerages for any amount of time, you have probably recognized that “Buy” and “Outperform” ratings are given far more often than “Sell” and “Underperform” ratings.
Brokerages are under a lot of pressure from publicly traded companies to give them positive stock ratings. For all intents and purposes, the “strong buy” has become the new “buy” recommendation. The “buy” recommendation is now a “hold” recommendation and the “hold” recommendation is really a sell recommendation.
Analyst Ratings Network did an analysis of its database that contains more than 125,000 stock ratings from 350 different equities research firms to find out whether or not that the perception that stock ratings are inflated is really true.
Here’s what they found:
- 8.18% of all ratings given were a “sell” rating or equivalent.
- 43.94% of all ratings given were a “hold” rating or equivalent.
- 47.23% of all ratings given were a “buy” rating or equivalent.
- 0.66% of all ratings given were a “strong buy” rating or equivalent.
Given that only 8% of ratings issued by equities research firms during the last two years were “sell” ratings, it’s a safe assumption that more companies receive favorable research than they probably deserve.
It’s important to look beyond the one-word summary rating that brokerages give to companies at face value. Investors need to look at their specific ratings system, evaluate the rationale offered and consider what upside they suggest is possible based on the stock’s current price and the 12 month price target they set.
Investors should also verify the credibility of the brokerage giving out the rating and the price target. Analyst Ratings Network also tracked which brokerages issue the most accurate price target. Williams Capital, had 12 month price targets that varied an average of only 8.5% from their actuals. The bottom 10 ranked brokerages had 12-month price targets that were off by more than 200% of their actuals.