Analysts use labels such as Buy, Strong Buy, Sell, Underperform, Hold, and Neutral to rate stocks, but investors really only need to see Buy or Don’t Buy, contends an article in Barron’s.
Take, for example, 3M. The stock is down about 50% from its record 2018 high, thanks to sluggish sales for the past decade and ongoing legal issues. Wall Street ratings vary; one analyst says Buy, seven rate it as a Sell, and thirteen have labeled it a Hold. But while that would suggest that analysts believe the stock will keep pace with the S&P 500, it’s actually just a nicer version of the Sell label, according to Jim Osman of The Edge Group, who is quoted in the article. A Sell rating isn’t good for business, and analysts want to avoid looking bad if the stock winds up going the other way. “Hold is the middle ground that really is useless for the investor, but safe for the analyst,” Osman says.
Indeed, companies can get mightily offended if their stock gets hit with a Sell rating, but a Hold label is much less contentious. But there isn’t anything nefarious about a company’s issues or reputation influencing its stock rating. That sort of brokerage research is generally read by experienced, professional investors, and most of them aren’t concerned about a stock’s rating. Rather, they are more focused on the analyst making the rating and their knowledge of the industry, the article maintains.
But while the article advises investors not to take each and every rating literally, they are still worth considering. Studies have shown that ratings do impact the market; stocks with a Buy rating, for example, have been shown to outperform the market on average.