What Analyst Ratings Mean
Wall Street analysts publish ratings and price targets on stocks. Rallies displays this data on stock pages to help inform your research. But what do these ratings actually mean, and how should you use them?Analyst ratings are one input for your research, not recommendations from Rallies. Rallies does not provide investment advice. Always do your own due diligence before making investment decisions.
How Analyst Ratings Work
Who Are Analysts?
Analysts are professionals at investment banks, brokerages, and research firms who:- Study specific companies and industries in depth
- Build financial models to estimate future performance
- Publish research reports with their conclusions
- Issue ratings and price targets
What They Publish
Analysts typically publish:- Ratings: Their recommendation (buy, hold, sell, or variations)
- Price Targets: Where they expect the stock to trade
- Research Reports: Detailed analysis supporting their view
- Earnings Estimates: Projections for future quarters and years
Understanding Ratings
Common Rating Categories
Different firms use different terminology, but ratings generally fall into these categories:| Category | Common Terms | Meaning |
|---|---|---|
| Strong Buy | Strong Buy, Conviction Buy | Highest conviction positive rating |
| Buy | Buy, Outperform, Overweight | Analyst expects stock to beat the market |
| Hold | Hold, Neutral, Market Perform, Equal Weight | Analyst expects stock to perform in line with market |
| Sell | Sell, Underperform, Underweight | Analyst expects stock to lag the market |
| Strong Sell | Strong Sell | Highest conviction negative rating (rare) |
Why Terminology Varies
Each firm has its own rating system. “Outperform” at one firm is equivalent to “Buy” at another. Rallies normalizes these into standard categories for easier comparison.Consensus Rating
The consensus rating combines all analyst ratings into a single summary: How it works:- Each rating is assigned a numerical value (e.g., Strong Buy = 5, Buy = 4, Hold = 3, Sell = 2, Strong Sell = 1)
- The average is calculated
- The result is displayed as a consensus (e.g., “Buy” or “Hold”)
- 10 analysts rate a stock
- 5 say Buy (4), 4 say Hold (3), 1 says Sell (2)
- Average: (5x4 + 4x3 + 1x2) / 10 = 3.4
- Consensus: Moderate Buy
Rating Distribution
Beyond the consensus, look at the distribution:- 10 Buys, 0 Holds, 0 Sells: Strong consensus
- 5 Buys, 3 Holds, 2 Sells: Divided opinions
Price Targets
What Is a Price Target?
A price target is an analyst’s estimate of where the stock price should trade, typically over the next 12 months.Price Target Metrics
| Metric | What It Shows |
|---|---|
| Average Target | Mean of all analyst targets |
| Median Target | Middle target (less affected by outliers) |
| High Target | Most optimistic analyst view |
| Low Target | Most pessimistic analyst view |
| Upside/Downside | Percentage from current price to average target |
How to Interpret Targets
Example:- Current Price: $100
- Average Target: $120
- High Target: $150
- Low Target: $90
- Upside: +20%
Target Accuracy
Research shows analyst price targets are directionally useful but often inaccurate in magnitude:- Analysts tend to be optimistic
- Targets are frequently revised
- Actual outcomes often fall outside the projected range
Rating Changes
When analysts change their ratings, it can move stock prices. Rallies shows recent rating changes.Types of Changes
| Change Type | Meaning |
|---|---|
| Upgrade | Rating improved (e.g., Hold to Buy) |
| Downgrade | Rating lowered (e.g., Buy to Hold) |
| Initiated | Analyst starts coverage with initial rating |
| Reiterated | Analyst maintains current rating (often with new target) |
Why Ratings Change
- Earnings results: Beat or miss expectations
- Guidance changes: Company raises or lowers outlook
- Industry developments: Sector-wide factors
- Valuation: Stock moved significantly
- New information: Product launches, competitive changes, management shifts
Impact of Rating Changes
Upgrades and downgrades can cause short-term price movements:- Upgrades often push prices higher
- Downgrades often push prices lower
- Impact is largest when unexpected or from influential analysts
Earnings Estimates
Analysts also publish earnings estimates for upcoming quarters and years.Key Metrics
| Metric | What It Shows |
|---|---|
| EPS Estimate | Expected earnings per share |
| Revenue Estimate | Expected total sales |
| Consensus Estimate | Average of all analyst estimates |
| Estimate Range | High and low estimates |
| Revisions | How estimates have changed over time |
Earnings Surprises
When companies report actual results:- Beat: Actual exceeds estimate (usually positive for stock)
- Miss: Actual falls short of estimate (usually negative for stock)
- In-line: Actual matches estimate (muted reaction)
Forward Guidance Matters
The stock’s reaction to earnings often depends more on forward guidance than the actual results. A company can beat estimates but drop if guidance disappoints.How to Use Analyst Data
As One Input, Not the Answer
Analyst ratings should inform, not dictate, your decisions:- Consider why they have their view
- Understand their assumptions
- Weigh against your own research
- Remember analysts can be wrong
Look for Consensus Shifts
A single rating change may not matter. But if multiple analysts are moving in the same direction, pay attention—it might reflect genuinely changing fundamentals.Consider the Source
Some analysts have better track records than others. Consider:- How accurate has this analyst been on this stock?
- Is this analyst an expert in this industry?
- Does the firm have potential conflicts of interest?
Use Disagreement as Research Fuel
When analysts disagree:- Read the bull and bear cases
- Understand what would need to happen for each view to be right
- Form your own informed opinion
Track Changes Over Time
Estimate revisions over time can be more informative than a single snapshot:- Consistently rising estimates: Positive trend
- Consistently falling estimates: Negative trend
- Stable estimates: Expectations are set
Limitations of Analyst Ratings
Optimism Bias
Studies show analysts are more likely to issue Buy ratings than Sell ratings. Reasons include:- Relationships with company management
- Investment banking business considerations
- Career risk (being wrong on the downside is punished more)
Lagging Indicators
Analysts often upgrade after stocks have already risen and downgrade after they’ve fallen. By the time there’s consensus, the move may be largely complete.Herding Behavior
Analysts tend to cluster around similar targets. An analyst who is too far from consensus takes career risk. This can reduce the information value of consensus estimates.Conflicts of Interest
Analysts at investment banks may have conflicts:- Their firm may do business with the company
- Their firm may own the stock
- Internal pressure to support banking relationships
Not a Substitute for Research
Even correct ratings don’t tell you:- At what price to buy
- How long to hold
- How the stock fits your portfolio
- Your personal risk tolerance
Analyst Data in Rallies
Where to Find It
On any stock page, look for the Analysts section:- Consensus rating
- Rating distribution
- Price targets
- Recent rating changes
- Earnings estimates
Using the AI
Ask the AI to help interpret analyst data:“What do analysts think about this stock?”
“How have estimates changed recently?”
“What’s the bull case analysts are making?”
“Why might analysts be wrong about this company?”The AI can summarize analyst sentiment and provide context.
Tips for Working with Analyst Ratings
1. Focus on Changes, Not Levels
A stock with a consensus “Buy” rating has probably had that rating for a while. More informative: Are ratings and estimates improving or deteriorating?2. Understand the Why
The rating itself matters less than the reasoning. Read research summaries or ask the AI to explain the bull and bear cases.3. Consider Coverage
More analyst coverage generally means:- More reliable consensus
- Greater institutional interest
- More efficient pricing