MarketBeat provides investors with an expansive, and growing, toolbox of research tools. This article focuses on the ratings screener and explains how investors can use this tool to refine and/or provide a shortcut for their research.
The MarketBeat Ratings Screener gives investors a one-stop resource to search for any analyst rating issued for any quarter going back before the year 2000. The screener allows users to search for ratings issued by a specific analyst firm. For example, if an investor wanted to find ratings issued by Bank of America (NYSE: BAC) or Citigroup (NYSE: C), they would select that firm from the pull-down menu.
To take that further, the screener allows investors to further sort by a specific analyst name and/or by ticker symbol. For example to find analyst ratings issued by Bank of America for Walmart (NYSE: WMT) enter the ticker symbol WMT in the Ticker field.
The screener will provide investors with information such as:
- The action taken by the analyst (initiated coverage, reiterated prior guidance, raised or lowered price target, etc.)
- The old and new ratings (if applicable).
- The stock’s current price as well as the analyst’s old price target and current price target.
- The percentage upside between the new price target and the stock’s current price.
The screener also allows investors to search for past ratings by selecting a beginning and ending date. Investors can fine-tune their search even more by screening for specific price targets, current analyst ratings, or stocks with a specific percentage upside.
What Are Analyst Ratings?
As part of their due diligence, many investors rely on analyst ratings. An analyst rating offers an opinion about the valuation of a stock and gives investors an idea into the opportunity available with each stock. The rating is based on a deep dive into a company’s financials including:
- Studying the company’s income statement, balance sheet, and cash flow statement.
- Listening to or reading a transcription of the company’s earnings call.
- Interviewing company insiders and even customers to get a sense of the short- to mid-term outlook for the stock.
Once an analyst gathers this information, they will put together a report that provides their thoughts on the current financial health of the company and the outlook for the business in the coming quarters. Their insight takes into account current market conditions as well as industry-specific issues. This information is made available to investment firms who will, at times, make this information available to retail investors, frequently for a small fee or by upgrading to a premium service.
Understanding the Ratings Used by Analysts
The three most commonly ratings used by analysts are buy, hold, and sell. While the names sound straightforward, they can be misleading and require context that can be gleaned from understanding what the same analyst has written regarding other stocks:
- Buy Rating: Conventionally, this means that the analyst is making a recommendation for investors to buy this stock or security. However, in some cases, a buy rating simply expresses an analyst’s opinion that the stock is likely to outperform the broader market. That means, when stocks are going up, investors can expect stocks with a “buy” or “strong buy” rating to move higher than the market average. And when stocks are going down, these stocks may still decline, but the performance of these stocks will be “less bad” than the broader market.
- Sell Rating: Like a buy rating, the sell rating conventionally means that an analyst is making a recommendation for investors to sell or liquidate their position in a stock or security. But again, sometimes this is only an expression of how the stock is likely to perform. In other words, in bear markets, this stock will decline more than the market average and in a bull market it may underperform the market.
- Hold Rating: This is sometimes referred to as a “Neutral” rating. When an analyst gives this rating, they are not calling for the investor to take a specific buy or sell action; rather they are giving their opinion on the performance of the stock. In this case, they are projecting that the stock will perform in a way that is consistent with the overall performance of the market and/or comparable companies within that sector or with a similar market capitalization.
Because of the potential for confusion created with only three ratings, many analysts have adopted additional categories that make their intention clear.
- Underperform Rating: Like the “hold” rating, this is a rating that refers to the projected performance of the stock. In the case of underperform it means that the stock is projected to perform below the market or sector average. Depending on the analyst words like “moderate sell”, “weak hold”, or “underweight” may be used to mean the same thing.
- Outperform Rating: In contrast to an “underperform” rating, securities that receive an “outperform” are expected to outperform the market or sector average. Once again, depending on the analyst, different terms may be used such as “moderate buy”, “accumulate”, or “overweight”.
When in doubt, investors should go to the website for the company issuing the rating. This will usually give them the specific meaning behind the rating that is issued. For example, Raymond James provides the following definitions for its equity research on its website:
Strong Buy - Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months.
Outperform (MO2): Expected to appreciate and outperform the S&P 500 over the next 12 to 18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12 to 18 months.
Market Perform (MP3): Expected to perform generally in line with the S&P 500 over the next 12 months and could potentially be used as a source of funds for more highly rated securities.
Underperform (MU4): Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold.
Suspended (S): The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon.
What are the Benefits of Analyst Ratings?
- Most Retail Investors are not Financial Professionals – Investors have access to more information than ever before. But most investors don’t have a background in corporate finance. Analyst ratings play a critical role in helping the everyday investor interpret numbers in a company’s financial statements.
- There Can be Strength in Numbers – When investors see that several analysts share the same general outlook for a stock, it can confirm their thoughts about a stock.
- Price Targets Provide Additional Context – Most analyst ratings include a price target. This is that analyst’s opinion on where the stock will be after a certain time period, usually 12 months. This helps investors form their price targets for buying and selling stocks.
- They Tend to Be Accurate – Analysts know that their personal reputation and the reputation of their firm will suffer if they issue an inaccurate rating.
Limitations of Analyst Ratings
- The Ratings are Subjective – Although the data used to form a rating is objective, an analyst’s rating can’t be purely objective. Anybody who’s bet on sports or played fantasy sports understands that the “experts” frequently get things wrong.
- Perception Can Shape Reality – There are some analyst firms that have a positive or negative reputation that can cause investment outlets and financial media to place an outsized amount of credibility to that rating.
- They Reflect a Moment in Time – An analyst rating expresses their opinion about the stock’s fortune at a moment in time. Many analysts revisit their ratings several times a year, usually around a company’s earnings report.
- Misreading the Analyst’s Comments – As we mentioned above, a “Sell” rating doesn’t necessarily mean that investors should sell (or short) the stock, especially long-term investors. But that’s how many investors interpret it which can cause a stock to fall below its intrinsic value.
How Can Investors Make the Most of Analyst Ratings?
Although analyst ratings are not a guarantee of a stock’s future performance, they should carry some weight because analysts have access to a company’s management team and, in some cases, have insights that can be difficult for retail investors to access. With that in mind, here are a couple of guidelines to consider before acting on an analyst’s rating.
- Avoid Following the Herd – Many investors make the mistake of jumping on a stock that is soaring or selling stocks that are falling because of a “herd mentality”. This mentality fueled the meme stock movement in 2020 and 2021. However, this can lead investors to invest in stocks of companies regardless of their fundamentals. To avoid this, remember make sure you invest in companies that have business models you understand.
- Know Your Tolerance for Risk – This is something that many investors overestimate. Analyst ratings don’t make allowances for individual risk tolerances. A small tech company may have a buy rating, but it may be too volatile for your comfort level. Likewise, a blue-chip stock that is given a sell rating may be doing so because it’s not growing as fast as an analyst would like. That growth, however, may be well in line with your investment objectives.
- Be Willing to Change Your Perspective – Analyst’s ratings are a snapshot of a stock’s outlook at a given moment. And you have to view that moment in light of where you are today and where you are going, not on where you were. If you’ve been investing for a long time and are now nearing retirement your risk tolerance and objectives have probably changed. So too will your perspective on certain securities. You may still think a stock is a great long-term buy, but your perspective of long-term has changed.