What do equity analyst recommendations mean?

What do equity analyst recommendations mean?

You often come across stock and industry reports made by analysts with various terminologies such as buy, accumulate, overweight, underweight. Let us try and understand what these various terminologies indicate.

Buy/ Accumulate or Sell/ Book Profits:

These recommendations tell you whether the analyst expects the stock price to rise, fall or trade in a range from its current price or on the day the report is published. If an analyst expects a company's performance in the near future to be good, he puts a buy / accumulate recommendation. On the other hand, if he expects the future financials to dive, he recommends you to sell the stock. Many a time a sell recommendation could also indicate that he expects the share price to drop sharply, and hence, is advising you to sell. Similarly, in the case of a buy recommendation it could indicate he expects the share price to move up sharply. A lot of time analysts suggest 'book profits' in the place of a sell, if he has recommended buying at a lower price and the stock has run up subsequently, leaving you with profits.

Hold:

On the face, a hold recommendation calls for maintaining a status quo. But this recommendation is far more useful when seen in conjunction with the analyst's earlier recommendation. If the analyst earlier had a buy, the subsequent hold means that he has downgraded the stock. However, if the stock was a 'sell' earlier, the new recommendation would mean that the company's prospects have improved.

Overweight / Outperformer:

It is a rating system used by an analyst to indicate the attractiveness of the stock being tracked. It conveys that the analyst is positive about the company. So, if an overweight rating is assigned to a stock, it indicates that an investor should hold proportionately more than the benchmark weight of a certain asset. So, if an analyst gives an overweight rating to say Infosys, it means in his opinion the stock offers more value for money than others in the sector. If the weight of Company X in Nifty is 8.55%, and the analyst is overweight it means you should hold more than 8.55% of Company X in your portfolio. However, as an investor, do not think that if a stock has been given an overweight rating you cannot lose money as the rating in no way conveys absolute return. If the Sensex slides by 20% over a month, a stock that is down by only 15% would be an 'outperformer'... but you would not have made any money on it.

Underweight / Underperformer:

Underweight indicates that an investor should hold proportionately lower than the benchmark weight of a certain asset. So if your advisor tells you to be underweight on Company A, he means your portfolio should hold less of 'A' than its weight in the index. If your advisor is underweight on A and its value in the Nifty is 11%, you should hold less than 11% of A in your portfolio. Equal Weight / Neutral – This indicates that the analyst is not very optimistic about a company's future, but neither does he have a negative view. He has no firm view on the company and feels that the company may perform in tune with the market and hence it is worthwhile holding it. Another way of looking at a neutral rating is to check the previous rating on the stock. It is a negative sign if the view on the stock has turned from a 'buy' to a neutral and a positive one if the view has turned from 'sell' to 'neutral'.