Gone are the days when analysts simply use Buy, Sell or Hold when making stock recommendations. A few brokers still continue to use these terms but more and more analysts are recently resorting to euphemisms — oftentimes called “fudged terminologies” — when making recommendations in their equity research reports.
For instance, we know what it means by a “Buy” but what exactly is a “Strong Buy”? And what about “Underweight” or “Overweight”?
We have an idea about “Underperform,” but what do we do if our broker rates a stock as “Market Perform”, “Peer Perform”, or “Underperform”?
Fortunately, we have this guide below that summarizes these seemingly perplexing terms related to analyst ratings which we can find on stock research reports.
Buy vs. Sell vs. Hold
Let’s begin with the commonly used terms in stock ratings.
The stock is expected to materially appreciate in price in the short-term. What then must we do? Generally, the broker is saying that we buy and/or accumulate the stock at current levels.
The stock is expected to materially decline in value, causing a potential material negative return. Thus, we are urged to dispose or unload the stock at current levels.
The stock is not anticipated to generate a materially positive or negative return. We may continue holding the stock until the next notice. Some brokers use “Neutral”, instead of “Hold”, but they generally mean the same thing.
Overweight vs. Underweight vs. Equal Weight
The stock is expected to perform better than the average performance of the company’s industry.
In a sense, this is similar to the rating “Buy.” The term “overweight” may also be used to refer to a portfolio. If a portfolio is “overweight” on a certain stock or industry, it means that the portfolio holds proportionately more weight of stock or industry compared to a benchmark portfolio.
For example, if the Philippine Stock Exchange index (PSEi) contains 5% mining stocks and a fund’s portfolio owns 10% mining stocks, the fund is said to be “overweight” on mining.
A stock rated “underweight” means that its performance is expected to be worse than the industry. If it refers to a portfolio, underweight means to unload the stock or industry in order to hold less than the proportional weight in a benchmark index. This is similar in concept to a “Sell” rating.
The total return of a stock is expected to be the same as the average return of the industry. If referring to a portfolio, the fund is said to be “equal weight” if it has almost or exactly the same proportional weight of stock or industry as in the benchmark index.
Outperform vs. Underperform vs. Market Perform
The stock’s total return is projected to exceed the average return of the industry (or its sector or its peers). This means the stock will perform better than the competition and is likely rated a “Buy”.
The stock is anticipated to fare worse than the industry (or sector or peer) average and is most likely a candidate for unloading or disposal.
Market Perform or Sector Perform or Peer Perform
The stock is expected to perform in line with the average return of the market (Market Perform) or its industry / sector (Sector Perform) or its peers / similar companies (Peer Perform). This rating is pretty much similar to a “Hold” or a “Neutral” rating.
With the prevalent use of more complex broker ratings and terminologies, we hope this post has helped you understand jargons in an equity research report!
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