One of the services provided to MarketBeat subscribers is access to a ranking of brokerage firms. MarketBeat’s Brokerage Rankings page is not meant to evaluate these firms based on their offerings. Instead, it gives investors a snapshot of which brokerages are making calls that positively impact a portfolio.
On a daily basis, MarketBeat updates its Brokerage Rankings so investors can see which firms are issuing ratings that provide the best return on investment (ROI) over a 7-day, 30-day and 12-month timeframe.
In this article, we’ll look at who the analysts are that work for these brokerage firms as well as what their ratings mean. We’ll also review why these ratings matter to investors.
What are Sell Side Analysts?
Brokerages rely on a team of analysts when issuing their ratings for a stock. These analysts are known as sell-side analysts. These analysts typically cover a portfolio of stocks and use research models to project a company’s financial outlook. They usually cover a specific sector or two, and have specific knowledge of the stocks in that sector.
Analysts typically release their ratings shortly before or after a company delivers its quarterly earnings report. This is a time when companies are required to disclose to the Securities & Exchange Commission (SEC) information that is materially important to their business. Companies will typically host analysts on an earnings call where analysts get a chance to receive more clarity on the company’s report.
Different brokerage firms will hire their own sell side analysts. So it is not uncommon for a stock to have a dozen or more analysts’ recommendations. When all the analyst ratings are released, the recommendation that is most common is known as the consensus estimate.
Understanding Analyst Ratings
- Buy Rating – This rating means that analysts expect a stock to outperform the broader market over the next 12 months. Therefore, investors who buy the stock should expect a profitable return. Brokerages may give a stock a “Moderate Buy” or “Strong Buy” rating. However, both ratings mean the same thing, but express varying degrees of conviction in that opinion.
- Hold Rating – This rating means that an analyst expects a stock to perform roughly in line with the broader market. Therefore, investors who already own the stock may simply want to hold the stock and not add to their position. It also could be a signal for investors who don’t have a position to avoid taking a position in the stock for the time being.
The Hold rating is sometimes criticized for being too vague. Brokerage firms rely on access they have to companies. That access can be compromised if it issues a Hold rating. Therefore, in recent years, it’s drawn a reputation for being a “Sell” rating in disguise.
- Sell Rating – This rating means that the analysts of a brokerage firm expect a company's stock to underperform the broader market. Therefore, investors who don’t have a long position in the stock may want to sell the stock because it is not expected to be profitable. It can be, however, a signal to short sellers that now is a good time to short a stock.
What Other Ratings are Issued?
Alternately, brokerage firms may issue an Overweight, Equal Weight, or Underweight rating. These are relatively new ratings that were developed in the aftermath of the internet bubble. The concern at that time was that analysts didn’t have a way of providing nuance to their ratings.
Therefore these new ratings were created to help analysts provide more context to their ratings. The ratings are meant to give investors a signal about price direction without being seen as offering specific buy, sell, or hold recommendations.
Here’s a brief overview of what each rating means:
- Overweight Rating – This rating is given by analysts when they believe a company is expected to deliver financial results that are better than others in it sector. One distinction of this rating as opposed to a Buy rating is that an overweight rating may be given to stocks of companies that are not yet profitable. That way, instead of issuing a buy signal, analysts see this as more of a directional signal. Many investors, however, still perceive this rating as a buy signal.
- Equal Weight Rating - This suggests that a stock will deliver financial performance that is roughly in line with the sector average.
- Underweight Rating - This suggests that a stock is not performing as well as others in its sector. This does not mean that a company has poor financials. But it means that the stock may not perform as well as others in its sector. This is where there is confusion about underweight ratings comes in. While analysts don’t interpret it as a sell rating, it could appear that way to investors.
What is the Significance of Sell-Side Analyst Ratings?
The primary job of the sell side analyst is to present investment recommendations to their clients based on their research of the companies they are following. This is done in an effort for the analyst to bring money into the firm that they work for.
In almost all cases, this research is given to customers of the brokerage firm at no cost. Investors can then use this analysis as part of the research they perform when selecting a stock. While these ratings provide one data point, it shouldn’t be the sole focus of an investor’s research. There are a few reasons for that.
For one thing, analysts may offer different opinions of the same stock. However, when investors get a sense of how accurate a brokerage firm has been in delivering buy or strong buy ratings, it may give them more confidence in assigning weight to that brokerage firm’s rating.
Another reason why investors need to pay attention to the results of brokerage ratings is that analysts can have conflicting motivations for the rating they offer. As pointed out earlier, analysts rely on the access they receive from companies to make their analysis. This creates a tension between making an absolute recommendation (i.e. buy, hold, or sell) as opposed to a directional signal which could be considered a relative decision.
Putting it All Together with MarketBeat Brokerage Rankings
You can imagine that analysts provide ratings for thousands of stocks. This can make it difficult when you conduct your research, particularly if analysts offer conflicting opinions about a stock. MarketBeat attempts to simplify that by issuing a ranking of brokerage firms.
So for example, if Stifel and Raymond James issue a similar rating for a stock, investors can use these rankings to see how each firm’s recommendation has played out in the stock price of the company they are rating.
The methodology is to rank firms based on their average return on investment (ROI) based on the stocks that each firm has issued a “Buy” or “Strong Buy” rating within a 12-month, 30-day, and 7-day time period. MarketBeat updates these rankings on a daily basis so investors have the most timely information.
The Final Word on Brokerage Rankings
MarketBeat brokerage rankings are one tool that investors use to interpret industry and company information. The rankings give investors a way to measure which firms are issuing ratings that are proving to provide the highest return on investment (ROI).
Since analyst ratings are usually initiated and/or updated around earnings season, the MarketBeat rankings help investors understand what to expect from a company’s earnings in the short term. Diving into this analysis will give investors a context that they won’t get from a consensus rating alone.
