Download the Schwab app from iTunes®Get the AppClose

  • Find a branch
To expand the menu panel use the down arrow key. Use Tab to navigate through submenu items.

Look Beyond the Analyst Rating and Read the Report

Look Beyond the Analyst Rating and Read the Report

There are two primary categories of analysis utilized by most traders:

  1. Fundamental analysis is the traditional financial statement-based examination of a company's revenues, earnings, cash flow and financial strength. It focuses on how a company is performing as a business, with the underlying belief that the stock price will ultimately reflect the performance of the company itself. Proponents of fundamental analysis believe it can help traders identify what to consider buying or selling as well as what to avoid altogether.
  2. Technical analysis involves the chart and indicator based examination of price history and volume, or more simply, the study of "supply and demand." This form of analysis focuses on “how” a company's stock is performing but not necessarily “why” it is performing the way it is. Proponents of technical analysis believe it can help traders identify advantageous times to buy and just as importantly, when to sell. 


In this article will focus on just one aspect of fundamental analysis—the use of analyst ratings and reports. An “Analyst Rating” for a given stock is essentially a professional opinion as to the investment prospects of a company based upon that analyst's assessment of the factors affecting the company based on the analyst’s education, experience and investment viewpoint.

When considering analyst ratings the best advice is to go beyond the analyst’s rating (buy, hold or sell) itself and to read the research report that goes along with the rating in order to better understand the analyst's rationale for a specific rating.

Growth versus value

Each analyst has different background and, perhaps most importantly, they often have different investment points of view. Although there can be many nuances, there are two main analyst “styles”, which are typically referred to as "growth” and “value”.

*An analyst educated and trained in the growth camp will tend to focus on companies that are rapidly growing their earnings, sales and market share.

*An analyst educated and trained in the value camp will tend to favor companies that he or she believes offer good relative "value," i.e., a low price/earnings ratio, a strong balance sheet, a high dividend yield and/or other classic measures of investment value.

It's rare that a company meets both sets of criteria: rapid earnings growth and good relative value. This explains in part why there can be such wide-ranging discrepancies in analyst ratings. It is not uncommon for a growth-oriented analyst to give a favorable rating to a particular stock, while a value-oriented analyst reviewing the same stock gives it an unfavorable rating and vice versa.

How do I determine an analyst's point of view?

Analysts do not always identify whether they are focused on value or growth. As a result, you need to read the analyst’s report in order to determine which approach an analyst may use. Oftentimes reading a report can provide important clues into the analyst's point of view. This leads us to the next question.

Which analyst's point of view do I believe?

A common dilemma faced by traders looking for information to help them make decisions is that different analysts often have different opinions. So which one is best? Who do I believe (trust)? Are these guys looking at the same company?  This situation can create some angst for many traders. But it can actually be good to have varying ratings on the same stock because it creates an opportunity for a trader to consider both a bullish and bearish point of view and to make up his or her own mind.

Let's look at an example. The screen shot below is from www.Schwab.com and shows three different ratings on Merck, & Co, Inc. (ticker MRK). Ned Davis Research shows a sell rating, Argus Research shows a buy rating and Standard and Poor's shows a neutral (three stars) rating.

Analyst ratings don't always match up

Look Beyond the Analyst Rating

Source: schwab.com, 

If you are hoping for someone to make a decision for you, it can be frustrating to find three differing viewpoints on the same stock. Hopefully you will ultimately recognize two things. First, you need to take responsibility for your own trading decisions. Second, considering different viewpoints allows you to make informed decisions and should be viewed as a potential benefit and not as a chore or a source of frustration.

There are three other points that should be made here:

  1. The yellow arrows in the screenshot point to the date of each research opinion. Notice that all of the dates are different and that some of them are older than 60 days. The dates show when each research firm last changed their opinion. However, it does not mean that the research firm has not evaluated the company since then; it just means that the analyst chose not to change the buy, hold or sell rating since the time the report was issued. Also note that within research reports, the price data is usually updated daily and most research firms review each company every week. 

  2. Many research reports focus on a particular investment timeframe such as six months or a year.  Most fundamental research opinions have a 52-week (one year) timeframe. Note that that Argus Research has two different opinions: 12 months and five years. The other two research firms, Ned Davis Research and Standard and Poor's, do not specify a timeframe for their opinions. In this case, it's reasonable to assume that those opinions reflect a 52-week timeframe. 

  3. It is a fact of life that research firms typically issue far more buy ratings than sell ratings. This applies to both research firms with investment banking as well as independent research firms. There are a number of reasons for the preponderance of buy versus sell ratings—one may be simply that not many analysts are interested in writing about stocks with poor investment prospects.

Third party research

In addition to Schwab Equity Ratings, Schwab provides research opinions and reports from a variety of third-party firms. Here's a brief look at those:

Company Number of 
rated stocks
Breakdown of 
stock ratings
Comments
Credit Suisse 855 Outperform 
Neutral 
Underperform
Has an investment banking division
Ned Davis Research 1,393 Buy
Hold 
Sell
Independent research firm
Standard & Poor's 
STARS
1,224 5 STARS 
4 STARS 
3 STARS 
2 STARS 
1 STAR
Primarily credit rating agency
Standard & Poor's 
"Earnings & Dividends" Ratings
3,725 A+
A
A-
B+
B
B-

D
Primarily credit rating agency
Argus Research 432 Buy 
Hold 
Sell
Independent research firm
Reuters Consensus 
Brokerage Analyst Ratings
4,049 Buy 
Outperform 
Hold 
Underperform 
Sell
Primarily news rating agency

Summary

Research opinions and reports are an important aspect of fundamental analysis. Remember, you need to look beyond the rating and read the research report in order to determine whether the analyst's opinion is in sync with your own view of a stock's prospects, or if the information presented is sufficient to alter your own opinion. This habit can also help you to educate yourself regarding which factors are most important when evaluating a potential trading opportunity.

Key Strategy Considerations - Timeframe
Key Strategy Considerations: Timeframe
Price to Sales Ratio (P/S): A Fundamental Value Analytic
Price to Sales Ratio - A Fundamental Value Analytic

Schwab has tools to help you mentally prepare for trading

Learn more >

Talk trading with a Schwab specialist anytime.
 
Call 888-245-6864
M-F, 8:30am - 9:00pm EST

Get 500 Commission-Free Online Equity and Options Trades for Two Years

Learn More >

The information here is for general informational purposes only and should not be considered an individualized recommendation or endorsement of any particular security, chart pattern or investment strategy.

The investment strategies mentioned here may not be suitable for everyone.

Security charts shown are for illustrative purposes only and should not be construed as a recommendation or an offer to sell, or a solicitation of an offer to buy any securities.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Schwab does not recommend the use of technical analysis as a sole means of investment research.

©2014 Charles Schwab & Co., Inc. (Member SIPC) All rights reserved.

(0614-3829)

Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.