In season 2, episode 21 of “Friends,” Monica invests in a stock because its name matches her initials. Thanks to modern investment intelligence platforms like Atom Finance, investors can now be a bit more selective when choosing which stocks to invest in.
Having a solid investing strategy and access to investment intelligence tools can empower investors to make smarter decisions. The article below describes what analysts do, how their ratings can impact the market, and the value aggregated analyst ratings can have in an investor’s decision-making process.
An analyst's role
A side-sell analyst is a financial professional who studies an industry or company and makes estimates and predictions about its future performance.
Usually, analysts work for research companies, investment banks, or private equity firms. They write research reports and come up with metrics, including earnings per share (EPS) estimates and revenue forecasts for the quarter, fiscal year, and future years. Analysts’ individual estimates for a company’s earnings and revenues are averaged to create a consensus estimate. The consensus estimate is used as a benchmark to evaluate a company’s potential future performance.
Analysts also make specific recommendations to help investors decide what to do with a particular security. These recommendations are generally published quarterly, but they can be published more frequently—following a corporate announcement, for example.
The rating scale
Analysts look at all of the research they’ve compiled on a particular company and then come up with a simple forward-looking recommendation to buy, hold, or sell a stock.
Analysts’ ratings aren’t universal, but they generally fit into the following scale:
Strong buy: A strong recommendation to buy a stock because the company is expected to greatly outperform.
Buy: A recommendation to buy a stock because the company is expected to outperform.
Neutral: A recommendation to hold a stock because the company is expected to perform in line with comparable companies or its benchmark.
Sell: A recommendation to sell a stock because the company is expected to underperform.
Strong sell: A strong recommendation to sell a stock because the company is expected to greatly underperform.
The potential impact of analyst ratings
An earnings surprise occurs when a company “misses” its benchmark by overperforming or underperforming.
Stocks may move in the short term based on an analyst upgrade or downgrade or in response to an earnings surprise. However, this volatility is generally short-term. A 2013 study by McKinsey & Company found that “a company’s performance relative to consensus-earnings estimates seems to matter only when it consistently misses them over several years.”
Three reasons investors should have access to analyst ratings
There are a lot of cautionary tales about relying too heavily on analyst ratings. The truth is, analyst ratings can be a valuable investment intelligence tool when used in combination with a thoughtful investment strategy and other investment intelligence tools. Specifically, analyst ratings can help investors:
See what’s trending. Regardless of how analysts rate a company, the fact that they’re rating the company at all is telling. When a company attracts analysts’ attention, it attracts investors’ attention too—which increases the liquidity of the company’s stock.
Identify a red flag. If one analyst downgrades a company, investors may take the recommendation with a grain of salt. But if several analysts come to the same conclusion, investors should take notice.
Validate their research. Analyst ratings can help an investor choose between similar securities after they’ve thought about their investment goals and asset allocation. For example, if an investor is interested in finding a stock that meets specific requirements to complement their target asset allocation, analyst ratings can be one of the tools they consult when comparing securities and deciding which stock to invest in.
Atom’s analyst ratings API
Visual example of aggregated analyst ratings with a overall rating of 58 percent buy.
We designed an API that aggregates data from multiple sources, provides meaningful insights, and offers unique visualization options—including a chart showing how analyst ratings changed from the previous rating—to help investors get the most value from analyst ratings.
For more information about the APIs we offer, visit our webpage. If you’d like to talk with a team member, contact us.
