Buy, sell, or hold? Investors often seek direction in a complex and unpredictable market. Some turn to Wall Street analysts, whose job it is to make predictions about future stock performance.
When investors want insights into a companys performance or potential that could influence their investment decisions, they often turn to Wall Street analysts. Brokerages or fund managers may hire investment analysts, or they may be independently engaged to analyze particular stocks.
Analyst ratings are not an exact science, but they can provide real insight to help investors make advantageous investing decisions.
TL;DR
- Wall Street analysts study financial documents, company management, and other relevant information in order to evaluate investment potential of companies.
- There are three primary types of analysts: sell-side, buy-side, and independent analysts.
- Analysts may provide ratings of certain companies recommending whether investors should buy, sell, or hold those securities.
- Investors should read Wall Street analyst ratings carefully, being aware of different rating scales and when the rating was published.
- Analyst ratings should be viewed as one tool in the investors toolkit to evaluate stocks, not taken at face value without other investigation and analysis.
What do Wall Street analysts do?
Wall Street equities analysts conduct detailed research into the operations and leadership of publicly listed companies. Then, they aggregate their findings to create ratings of those companies.
These analysts gather and examine a broad range of resources to compile an accurate picture of public companies. Here are some places they may gather information from:
- The SEC (Securities and Exchange Commission)
- Meetings with company management
- Interactions with customers and suppliers
Financial statements contribute to analysts research. They also attend conference calls led by company executives. Analysts examine the fundamentals of companies to analyze their current health and projected growth and revenue. Equities analysts need to pay attention to any company-specific news or developments like changes in management or quarterly earnings.
Analysts also monitor the general state of the sectors they specialize in. This makes them aware of important developments industry-wide that could impact the stock value of individual companies or funds within that industry.
As for investors, some analysts release reports online for free, but many cost anywhere from $15 to hundreds of dollars. Subscription-based platforms may also require people to sign up for a paid plan to access analyst predictions. Analysts may get compensated based on deals resulting from their reports, or based on profitability.
What are the types of analysts?
There are three general types of equities analysts who rate public companies: buy-side analysts, sell-side analysts, and independent analysts.
- Sell-side analysts: Brokerages hire sell-side analysts. They provide their research to customers who may follow up by investing in companies.
- Buy-side analysts: Pension funds and fund managers employ buy-side analysts, who usually specialize in a few distinct sectors.
- Independent analysts: As the name suggests, independent analysts are not employed by fund managers or brokerages, but conduct their equities analysis independently.
When considering the ratings of a Wall Street analyst, find out through their disclosures who is employing them, which could have an impact on how they develop their ratings (including potential bias in the process).
How should investors read analyst ratings?
When reading analyst ratings for your own investments, here are the basics.
Buy, sell, and hold are the three primary ratings, but some firms also use middle areas like underperform and outperform. Some analysts will use terms like strong buy or strong sell to add emphasis.
Consider how different firms interpret their ratings. For example, a buy rating from one firm might be labeled as outperform elsewhere. One brokerage’s underperform might be another’s moderate sell.
Since theres no universal scale, do a little digging into what the company providing the analyst research means by each rating term. Websites that aggregate analyst ratings (like TipRanks) may be helpful, and they often give ratings on a number scale.
Analysts also usually report important financial data and provide projections about earnings per share, revenue, and other information about a stock in an analyst report. Even though you shouldnt take ratings like buy and sell at face value, this type of data can certainly be useful in guiding investing decisions directionally.
If you visit Publics stocks & ETFs page, you can view aggregate ratings for each individual stock along with recent financial results and price targets. Search for a ticker and tap on the page to find the analysis. As always, note the timing of the ratings as things may have changed after an analyst has issued a report.
How accurate are Wall Street analyst ratings?
Some Wall Street analyst ratings are highly accurate, meaning their ratings lead to successful returns for investors. However, in the stock market, nothing is truly guaranteed. This means investors want to interpret analyst ratings with a healthy dose of skepticism.
TipRanks reported its top 25 analysts as having a 67.6% success rate from 20112020, resulting in returns that beat the index by 21% over that decade. The highest-ranking analyst of that period was Joseph Foresi of Cantor Fitzgerald, with a success rate of 89%.
Pay attention to the timing of analyst recommendations, as factors impacting stock value can shift quickly and ratings arent necessarily up-to-date when you find them.
Wall Street analysts have more expertise in interpreting the data for each of their target companies than the average person. They can likely provide more in-depth analysis than you might be able to do on your own. Consider a sector-focused analyst who is deep not only in specific companies themselves but also the competitive market in that vertical overall. However, that expertise doesnt guarantee a certain level of performance or returnseven if you follow a certain analysts recommendations.
Remember: The stock market moves quickly, and analyst reports aren’t updated in real-time. Consider other, more recent evaluation methodslike reading a stock chart or keeping your finger to the pulse of the news.
Do analysts rate cryptocurrencies?
There are ratings available for Coinbase Global, a publicly-traded crypto exchange. JMP Securities began coverage of its stock earlier this fall, even giving it a buy rating. However, most securities analysts dont cover cryptocurrency coins themselves in their ratings.
Cryptocurrency as a whole is still viewed as an emerging alternative asset and lacks widespread, mainstream adoption. Crypto values tend to be volatilejust look at Shiba Inu (SHIB), which fell about 15% on Oct. 28, 2021 after rising nearly 130 percent in the week leading up to it. That’s nothing compared to the one-year gains, but it’s still suggestive of a highly volatile environment during short-term windows. By way of another example, the value of Bitcointypically one of the more stable assetshalved in the summer of 2021 before rebounding back to previous levels.
This swift movement may be why investment analysts are reluctant to venture into the process of rating crypto.
Additionally, cryptocurrencies dont represent a company. This means that Wall Street analysts are unable to conduct their typical research to make their recommendations.
Bottom line
Wall Street analysts do extensive research into particular companies to provide their best recommendations for what investors should do. Their research can be a valuable tool in helping investors make choices about their stock holdings. Still, analysts arent perfect and do make wrong assessments. Consider analyst ratings as part of a larger investment strategyone that takes into consideration timeliness, bias, personal goals, and diversification.