Analyst stock ratings: Not what you think

If you’re researching stocks, you’ll likely come across “buy,” “sell” or “hold” ratings issued for companies by Wall Street analysts. They can seem very important, but they’re not as meaningful as you might think.

The ratings themselves can have many names. There are “buy” and “strong buy” ratings; “outperform” and “overweight” are also buy ratings, though a bit less enthusiastic. “Hold” can also be expressed as “market perform” or “equal weight,” while many “sell” ratings are expressed obliquely, as “underperform” or “underweight.” You’ll sometimes see actual “sell” or “strong sell” ratings, but not too often.

So why are the ratings not so meaningful? Well, there are different kinds of stock analysts — “buy-side,” “sell-side” and “independent” ones. Buy-side analysts work for institutional money managers (like mutual fund managers) and prepare reports and recommendations about companies for their employers.

The stock ratings you’re most likely to run across are from sell-side analysts, who often work for major brokerages and prepare research and ratings that other companies buy. They can have conflicts of interest, such as when their employer also does investment banking work for companies — because negative, bearish reports can result in lost business. That’s why “sell” ratings are relatively rare. Their employer may also own shares of the companies covered, and stand to benefit from bullish reports that get more people buying shares of the companies, driving up the price.

There are independent analysts, too, who are paid by companies that don’t do investment banking work or who just offer their reports on a subscription basis. Pay more attention to their research.

And speaking of research, many brokerages offer access to a wide range of analyst research reports. If yours does, they may contain a lot of good information — so try to look well beyond a simple “buy” or “hold” rating.