Brokerage Rankings

Brokerages rely on a team of analysts when issuing their ratings for a stock. These analysts are known as sell-side analysts. These analysts typically cover a portfolio of stocks and use research models to project a company’s financial outlook. They usually cover a specific sector or two, and have specific knowledge of the stocks in that sector.

Analysts typically release their ratings shortly before or after a company delivers its quarterly earnings report. This is a time when companies are required to disclose to the Securities & Exchange Commission (SEC) information that is materially important to their business. Companies will typically host analysts on an earnings call where analysts get a chance to receive more clarity on the company’s report.

Different brokerage firms will hire their own sell side analysts. So it is not uncommon for a stock to have a dozen or more analysts’ recommendations. When all the analyst ratings are released, the recommendation that is most common is known as the consensus estimate.

Alternately, brokerage firms may issue an Overweight, Equal Weight, or Underweight rating. These are relatively new ratings that were developed in the aftermath of the internet bubble. The concern at that time was that analysts didn’t have a way of providing nuance to their ratings.

Therefore these new ratings were created to help analysts provide more context to their ratings. The ratings are meant to give investors a signal about price direction without being seen as offering specific buy, sell, or hold recommendations.

Here’s a brief overview of what each rating means:

• Overweight Rating – This rating is given by analysts when they believe a company is expected to deliver financial results that are better than others in it sector. One distinction of this rating as opposed to a Buy rating is that an overweight rating may be given to stocks of companies that are not yet profitable. That way, instead of issuing a buy signal, analysts see this as more of a directional signal. Many investors, however, still perceive this rating as a buy signal.
  
  
• Equal Weight Rating - This suggests that a stock will deliver financial performance that is roughly in line with the sector average.
  
  
• Underweight Rating - This suggests that a stock is not performing as well as others in its sector. This does not mean that a company has poor financials. But it means that the stock may not perform as well as others in its sector. This is where there is confusion about underweight ratings comes in. While analysts don’t interpret it as a sell rating, it could appear that way to investors.

The primary job of the sell side analyst is to present investment recommendations to their clients based on their research of the companies they are following. This is done in an effort for the analyst to bring money into the firm that they work for.

In almost all cases, this research is given to customers of the brokerage firm at no cost. Investors can then use this analysis as part of the research they perform when selecting a stock. While these ratings provide one data point, it shouldn’t be the sole focus of an investor’s research. There are a few reasons for that.

For one thing, analysts may offer different opinions of the same stock. However, when investors get a sense of how accurate a brokerage firm has been in delivering buy or strong buy ratings, it may give them more confidence in assigning weight to that brokerage firm’s rating.  

Another reason why investors need to pay attention to the results of brokerage ratings is that analysts can have conflicting motivations for the rating they offer. As pointed out earlier, analysts rely on the access they receive from companies to make their analysis. This creates a tension between making an absolute recommendation (i.e. buy, hold, or sell) as opposed to a directional signal which could be considered a relative decision.