Wall Street is a tough place to make a living. Traders who don’t stay ahead of the curve find themselves in the position Norm Peterson—the hilarious character on Cheers—found himself in when he said during one of his famous entrances into the bar, “It’s a dog-eat-dog world, and I’m wearing Milk-Bone underwear.”
Everyone is looking for an edge in the stock market, and quite often, traders turn to stock analysts to get that edge.
[VIDEO] Understanding Stock Analyst Research and Recommendations
What is a Stock Analyst?
A stock analysts is a person—typically employed by a large bank, investment firm or analysis company—who devotes his/her life to learning and making predictions about a company and its future performance.
Stock analysts sift through company reports and filings, talk to company management, probe customers and competitors and basically do whatever they can to find out if a company is healthy and growing or sick and shrinking. Because this is incredibly demanding work, stock analysts typically only monitor one or two companies at a time.
How do Stock Analysts Share Their Findings?
Stock analysts share their findings on the stocks they are watching in the following three basic ways (ordered from most useful to least useful):
– They issue quarterly earnings expectations
– They issue “Buy” and “Sell” recommendations
– They issue projected price targets
Quarterly Earnings Expectations
Publicly traded companies are required to announce their earnings, or lack thereof, once a quarter—during a time called “Earnings Season”—for the benefit of company shareholders. To help investors prepare for these quarterly announcements, analysts issue their expectations for what they believe the company’s earnings will be.
For instance, an analyst watching Apple (NSDQ: AAPL) may issue an earnings expectation of $1.75 per share in Q3. This means that the analyst believes Apple will report that it earned $1.75 per share during the third quarter of the year.
Since analysts spend so much time analyzing a company, their earnings expectations are usually relatively accurate.
“Buy” and “Sell” Recommendations
Stock analysts issue “Buy” and “Sell” recommendations on the stocks they watch. Actually, they issue the following five recommendations:
– Strong buy
– Buy
– Hold
– Sell
– Strong sell
Many investors believe these recommendations are less useful for two reasons: they are too general, and they may be unduly influenced by outside forces.
Some stock analysts work for firms that do more than just analyze stocks. Sometimes, the other objectives of the firm are, or appear to be, in conflict with the objectives of the analyst to give an unbiased recommendation. This causes some investors to have less confidence in the recommendations from some analysts.Tip: One tip from the street is that a change from a “Buy” or “Strong Buy” recommendation to a “Hold” recommendation is usually viewed as an implicit “Sell” recommendation.
Projected Price Targets
Analysts also issue projected price targets of where they believe the stock price is going to be 12 months down the road.
Out of all of the estimates and projections analysts make, this is typically the least reliable—not because analysts don’t know an incredible amount about the company and its performance, but because it is extremely difficult for anyone to project a stock price 12 months into the future.