Finding the right stock for your portfolio depends on diligence and research. Research is the cornerstone to excellent stock picking.
Diligence is for realizing there may be another company more suited to your particular needs.
Four thousand or so stocks are actively traded on the three American exchanges. The rest are thinly traded and highly speculative.
The Internet leveled the playing field between Wall Street and the small investor. Within the last decade, thousands of Wall Street firms have opened shop branding themselves as “the only way to make money on Wall Street.”
Screening for a basket of stocks which meet your criteria is the first step in successful stock selection. Whole sites are devoted to one area of company metrics. EPS, dividends, cash flow, are just a few areas of study.
One of the valued numbers to consider when sifting through mounds of data is stock ratings. This rating refers to a stock price performance over a set period.
Are Stock Ratings Created Equal?
There are currently over 5,000 professional stock analysts in the United States. The analysts use available company data to predict price performance for one month, three months then one and two years.
The majority of these professionals underperform the market on a consistent basis.
Brokerage firms and their analysts spend vast sums of money and time pouring over every conceivable financial statement, ratio, and company executives.
It is the job of analysts to interpret data and arrive at stock price targets their customers can rely upon.
Buy, Sell, Hold
Stock analysts attach a rating to every stock they follow. These stock ratings give the investor guidance for short and long-term considerations.
Each Wall Street firm has their unique stock rating system which each analyst follows.
- Strong Buy/Outperform/Buy/Accumulate. The stock is expected to gain more than 20% in the next 12-month period and will outperform its sector.
- Hold/Market Perform/Peer Perform/Neutral. Performance of +/- 10% in the next 12 months. Moderate to substantial risk in fundamentals to the company.
- Sell/Market Underperform/Reduce. The analyst expects the stock to underperform the market by 10% or more. Company fundamentals are at risk.
Should Investors Listen to Wall Street Analysts?
Analysts have been handing out stock ratings since there was a Wall Street. Rating a stock has become popular in the 24/7 news cycle.
There are thousands of websites, books and TV shows dedicated to the subject, with investors hanging on every word. Should we put so much value on the opinion of one person?
Can investors make money relying on stock ratings or dare we say, make a living? It is essential to understand exactly what a stock rating is or is not.
A grade on an individual stock is a reliable benchmark as long as the firm itself is reputable.
A stock rating is not a single number that will generate money.
Successful investors treat a stock rating as they would any other number. They do not skip understanding the balance sheet or cash flow statements.
The rating is not a replacement for comprehension of market potential on the company’s new product line. The score is just another number for the toolbox.
The Bottom Line
Analysts and ratings come in all shapes and sizes. Some analysts are great and others terrible.
If an investor decides to utilize a stock rating in their selection process, it is important to know who is behind the rating.
Research the analyst and the firm they work for. Check with TipRank to see their track record over time. Some analysts have a good month or two, and every short-term investor is beating their door down.
Investors using the tools available, like the Wall Street Journal, can have significant returns compared to the market.
Many small-time investors look for the next big stock picking method. Using this type of approach is a quick way to lose every penny you have.
Every successful investor use research for making money on Wall Street, not a get-rich-quick scheme.
Stock ratings from good analysts can be a considerable advantage to small investors. The professional evaluation provides insights that otherwise would not have been available by just reading financial statements.
Small investors need every advantage when it comes to making money.
Without utilizing the tools and ratings available, Wall Street will see you coming.