On the different moves in a listed stock such as after the company's quarterly numbers as in the current scenario, brokerage houses as well as analysts either retain the previous 'ratings' or 'recommendations' on the stock or may change them as per their analysis on the stock. Herein this story we will delve a little deeper on what are the different stock ratings or recommendations assigned to stocks and how investors should take them up for their stock evaluation.
What is Stock Rating By Brokerages And Analysts?
Stock rating or recommendations by analysts for a stock is a sort of grading system using which they put forth the fair price of a stock before investors in comparison to its current market value. A rating is indeed a metric of the stock's likely future performance in a given time period.
Here we list out the different brokerage calls based on investment recommendation and broadly include these 6 types:
1. Strong Buy:
This rating or recommendation is usually assigned for a stock on which returns of over 25% are expected in the next one year. Both the fundamentals and momentum remain promising for the counter here. Here the measure of return is not only restricted to absolute terms but also can be in terms of relative returns. Say if a stock has the potential to outperform its index by more than 10% in a year, it can also be accorded a 'Strong Buy' rating.
Analysts typically assign this rating to a scrip when it foresees an upside of as much as 15-20% in absolute terms in one year time frame. The stocks with buy recommendation in relative terms can outperform the market indices by 5% in 1-year.
3. Accumulate or Add:
This 'Add' or 'Accumulate' rating is assigned to stocks that can mirror index returns or at least generate 10% return in the next one year. Besides this rating is for stocks that do not see immediate triggers but have the potential to outperform in the next three to four years. Herein investors' patience is called for.
This rating is for stock that shows decent upside potential but at the same time carries downside risk too. On such stocks the analyst are more cautious as while such stocks have a potential to move upward by as much as 15-16 percent in the next one year, they can end up lower by 10% due to the various risk factors.
Reduce call is given to stocks when there is clear negative view on the counter i.e. negative return of as much as 10-15% is anticipated from the stock in the next one year.
For stocks falling in the 'Sell' category there can be either a company-specific negative outlook or that can be for the entire industry. Usually for such stocks a downside of as much as 25% is seen in the next 1-year.
How Analysts Arrive At Such Stock Ratings For A Company?
Analysts give their conclusions on the stock with stock recommendations and 1-year price target by studying their financial statements, delving on company's quarterly conference calls and reviewing management commentary on the various guidance as well as aspects going ahead that the company may come up with during its earnings.
These analysts typically can even get in touch directly with the management and its key customers to have a clear idea on how the company is faring relative to its past performance and in comparison to its peers. Surveys and various researches can also be conducted to know the prospects of the company.
And then detailed research reports are released by investment banks and analysts on the stock with estimates on the EPS and revenues for the forthcoming quarters.
How investors' should read and interpret extensive reports and stock ratings?
Though these stock ratings have a bearing on individual stock which tends to sharply move the stock price either ways, investors given their subjective nature i.e. both stock rating as well as price target need to go by them only to determine whether or not the company is trading at a discount or a premium. And it should not be the whole-sole criteria to pick a stock for investment or get out of it say in the case of 'Sell' rating. Your overall investment horizon should play out here i.e. if you have position in some stock from a long-term perspective these ratings and re-ratings shouldn't nudge you to sell the stock.