It is increasingly more difficult to understand what exactly a “buy” rating means when so many stocks are trading at all-time lows. Or perhaps “underweight” is a preferred term when it comes to characterizing an undervalued stock. It turns out that the very analysts who rate companies are just as confused.
During a recent conversation with a sell side analyst, it became quite clear that determining whether a stock is a buy, sell or hold is like deciding whether you want whipped cream, chopped nuts or extra chocolate sauce on your sundae. They all appeal to different tastes, and while some are preferred, others are undeniably abhorred.
Personally, I despise chopped nuts. And if chopped nuts are the equivalent of a “sell” rating, so does the Street for the most part. The sell sider said most analysts are afraid of issuing sell ratings because they usually don’t make anyone happy. Buy ratings, much like whipped cream, can give an investor a quick jolt of happiness. But if the stock goes down, the analyst who issued the rating will have egg, or in this case, whipped cream all over his or her face. So where does that leave us? Extra chocolate sauce.
Yes, much like a hold rating, extra chocolate sauce never hurts. In fact, many analysts will simply issue a hold rating for the sake of not ticking anyone off. When in doubt, go with a hold.
And how about that cherry on top? Well, there is no such equivalent rating. Actually, the cherry is that extra dollop of knowledge you glean from having a conversation with an analyst, especially when the rating is a hold. A conversation will enable you to learn what an analyst really thinks about a stock and its potential before it melts away.
— Evan Pondel, Vice President, email@example.com