Buy, Hold, Sell: What Analyst Stock Ratings Mean

Analyst stock ratings seem straightforward: buy, sell, hold. But what if you see a phrase like long-term outperform or short-term underperform? Is that a buy, a sell, a hold

Brokerage firms often evaluate public companies using such methods as accounting data, industry research, or management interviews. The goal is assessing whether the outlook for a stock's price is good or taking a turn for the worse. Many brokers and investors may refer to analyst recommendations to help them choose investments that are appropriate for their portfolios. A change in a recommendation might drive purchases or sales of shares, which in turn affect the stock price.

The Securities and Exchange Commission ("SEC") and other industry regulators have rules in place to help make sure there is objectivity and transparency in research reports, the investing public is provided with reliable and useful information, and the ratings are not benefiting the firm or the analyst personally.

Although you should always do your own research and consider your personal financial goals, ratings are yet another tool to help you make decisions about your investments.

Most rating systems start with the basics: buy, sell, and hold. A buy is a stock that an analyst thinks you should buy now, a sell is one an analyst thinks you should sell, and a hold is one an analyst thinks is good enough to keep in a portfolio but not worthy of additional investment. Some firms use letters, numbers, or different words like positive, negative, and neutral to indicate analyst opinions.

Some rating systems include intermediate ratings, such as outperform or underperform, which may indicate a less aggressive stance than buy or sell. Others use intensifiers, such as strong buy and weak sell. And still others add time guidance to their recommendation, such as long-term or near-term.

While ratings are mostly straightforward, the nuances can be confusing. What does it mean if a stock has a rating like long-term neutral and short-term buy? To help, industry regulators have passed a series of rules for broker-dealer firms that are designed to help investors understand the reasoning behind the rating.

While the SEC regulates and oversees all aspects of the securities industry, the Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization that oversees U.S. registered broker dealers ("member firms") and the conduct and ethics of people who work within those firms. FINRA requires firms establish procedures to ensure facts in research reports are based on reliable information. Any recommendations, ratings, or price targets in reports must have a reasonable basis. Ratings should reflect research outcomes and be based on facts, independent of any conflicts of interest that the firm or its employees may have. Research reports containing ratings or price targets must also include certain information; for example, if a firm has assigned a rating to a security for at least a year, the research report should have a line graph with the security's closing prices along with an indication of when the rating was assigned or changed.

Research reports don't have to assign ratings, but many clients like to see them. Likewise, firms don't have to have a proprietary rating system, but if they do, they must put a description of it in all research reports. This should include the meaning of each rating in their system, the time horizon, and any benchmarks used. For example, is "outperform" relative to the entire stock market, an industry index, or the firm's coverage universe? The definitions for ratings must be consistent with plain meaning. A hold can't really be a sell, and a buy can't really be a hold.

In addition, the firm must disclose the percentage of securities they rate that receive each rating. The firm must also disclose the percentage of companies within each rating group that were investment banking clients at any time within the previous 12 months. This helps indicate any internal biases.

To help ensure transparency, FINRA rules include requirements relating to a firm's research coverage over time. If a research report contains either a rating or price target for a security that has been under coverage for at least a year, the report must include a line graph of the security's daily closing prices for the period the member has assigned any rating or price target or for a three-year period, whichever is shorter. The graph must also show when each rating or price target was assigned as well as the rating or price target assigned on those dates.

The illustration below shows some of the disclosures included in a Schwab Equity Ratings^® Report on Uber Technologies (UBER), including price performance, ratings changes, and the distribution of ratings across the universe of companies that have a Schwab Equity Rating.

The equity ratings system used by the Schwab Center for Financial Research considers growth potential, performance quality, investor sentiment, stability, and valuation.

Under Schwab Equity Ratings, securities are rated from A to F:

• A rating—strongly outperform: If an investor is looking to add a stock to their portfolio, A-rated stocks may be the best candidates to consider.
• B rating—outperform: An investor looking to add a stock to their portfolio should also consider a B-rated stock, although preference should be given to A-rated stocks.
• C rating—marketperform: An investor would not usually consider a C-rated stock for purchase. An investor that has a C-rated stock in their portfolio should consider continuing to hold the stock and monitor the stock's ongoing performance and compare the potential benefits of owning a stock with a higher rating.
• D rating—underperform: An investor holding a D-rated stock should consider whether it's appropriate to continue holding that stock in their portfolio. An investor would not usually consider a D-rated stock for purchase.
• F rating—strongly underperform: An investor holding an F-rated stock should consider whether it's appropriate to eliminate that stock from their portfolio. An investor would not usually consider an F-rated stock for purchase.

• Schwab Equity Ratings from the Schwab Center for Financial Research and third-party research reports from CFRA, Refinitiv, and Market Edge are available to Schwab accountholders. To find these reports, select Research, Research Tools, and then enter the ticker symbol or company name (see below).

• Schwab, CFRA, and Reuters Analyst Ratings on the Schwab Stock Screener: Schwab accountholders can access these under Research > Research Tools > Screeners > Analyst Ratings (see below).

Ratings can offer investors useful guidance about whether a stock may be a good addition to a portfolio, a source of cash if a better idea comes along, or something best avoided for the time being. Regulations set forth requirements for firms issuing ratings to foster transparency and objectivity in research reports as well as address conflicts of interest, but investors ultimately need to make their own decisions. After all, ratings are not a guarantee—even when the analysis is made responsibly and based on sound research.