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Whether you are a new investor or a seasoned professional, I am sure you have come across terms with a meaning or context which you might not be sure about. I feel every investor should have their own guide to terms and jargon that they know well enough to use in every day research and analysis.

Something that has been pointed out to our Account Executive team at CSS Investments is the “Broker Views” on our Morning Call newsletter.  What I have realised now is that different terms indicate different levels of expected performance and of course expected performance is exactly that – no analyst can guarantee that the price of a stock will perform in line with their recommendation. For example a “buy” recommendation could indicate more potential upside than an “outperform” equally however the price quoted might fall.  Let me explain…

First of all, broker recommendations vary. Some brokers will recommend a stock, others will recommend holding and yet others may suggest selling the stock. Their theme is similar but their implications such as expected performance and time horizon of the recommendation differ widely. For example, a “buy” recommendation from one analyst may mean that the company is expected to outperform its sector by 5% over 12 months, whereas another analysts’ buy recommendation may indicate a 15% share price upside or a 15% total return. It may indeed indicate the recommendation stands until it reaches a given price target.

It all depends on how the financial institution publishing the report defines its recommendation. This is more fully explained when the recommendation is published in the definitions section of the research note which is normally near the disclaimer section at the end of the report.

It should not be assumed that the majority of recommendations stand for a fixed period. In reality the recommendation stands until it is changed. It is possible that a recent upgrade is reversed within a few weeks. It is possible that recommendations change within three months. It is possible that a recommendation can remain in place for over a year. What we do know is the recommendation stands on the day it is published and possibly for some time period thereafter; the duration of which is uncertain.

Often (but not always) the recommendation lasts until the next trading update or the next financial report, be they interims, quarterly or preliminary results.

At the same time it is possible the period can be very short, if the company is in the midst of a major corporate event such as a takeover.

I will attempt to summarise the recommendations to represent the industry parlance. Financial institutions are constantly reviewing capital markets and therefore their recommendations on companies and sectors are updated regularly.

These descriptive terms vary and will be given in the definitions area of the report. Typically to simplify:-

Buy and Strong Buy

These two recommendations indicate that the analyst is recommending a particular company, usually suggesting it is a good time to consider buying or adding to the holding you already have.

This recommendation usually indicates a strong conviction that the shares are inexpensive relative to that financial institution’s expectations for that company.

Usually the “buy” or “strong buy” recommendation is accompanied with significant reasoning explaining why the analyst has arrived at this opinion.

It is possible that the recommendation is based on a particular insight into that company’s major drivers. That insight enables the analyst to project profit forecasts that differ from the average profit forecast, “the consensus forecast” for that company.

Outperform, Moderate Buy, Accumulate, Over-weight and Add

These recommendations do not necessarily indicate that the covering analyst is recommending you buy this particular company, however it may be a good company to consider if you are already looking at the sector or balancing your portfolio so that you are weighted towards the sector.

These descriptive terms vary and will be given in the definitions area of the report. Typically to simplify:-

Outperform – is a relative term suggesting the company’s return should exceed that of its industry peers or of a given benchmark index.

Moderate Buy – is a descriptive term that suggests some degree of caution should be applied when considering buying.

Accumulate – is a descriptive term that suggests the shares should be added, within certain parameters. It may be the stock is worth buying only under a given price level.

Overweight – is a relative term that suggests the “weight” of the shares in the portfolio should exceed that of the “weight” of the shares in the index. If for example BP represents 4% of the UK 100 index but 6% of your portfolio –you can be said to be “overweight” BP

Add – is a descriptive term rather like “moderate buy” that suggests caution to adding to the holding.

These recommendations suggest there might be potential appreciation in the company’s shares according to the definition of the recommendation in the Disclaimers/ Definitions”.

Hold, Neutral, In-Line and Equal-weight

There are two sides to these recommendations, first is that the holdings in a particular company should be equal to other holdings in that sector. This would only apply to someone that is already invested into the particular company.

These descriptive terms vary and will be given in the definitions area of the report. Typically to simplify:-

Hold – the reader/ investor should await key developments at the company, but do nothing in the short term.

Neutral – the financial institution does not have a view or is not convinced in its view as to whether the company’s shares are too high or too low. A Neutral rating suggests the share price is “up with events” and reflects current and expected developments.

In Line – the company is reporting numbers that are very similar to previous forecasts for that company.

Equal weight – the investor should hold this company in proportion to its index weight.

The second side of these recommendations is that the potential return on equity is expected to have a variation of +5% – (-5%) against the sector or index over the covering period.

Underperform, Moderate Sell, Weak Hold, Underweight and Reduce

Again, these recommendations suggest some factor has changed at the company and the financial institution now expects future profits to be lower than current expectations.

These descriptive terms vary and will be given in the definitions area of the report. Typically to simplify:-

Underperform – this is a relative term suggesting the company’s performance in terms of total return will be less than its peer group companies or a given index or sector index.

Moderate Sell – this is a descriptive term suggesting the financial institution views the company’s valuation as high relative to its peers or financial forecasts or both.

Weak Hold – this is a descriptive term suggesting a lower confidence than “Hold” and suggests the financial institution is in the process of changing its view on the company from Hold to Sell, but is awaiting key developments before doing so.

Underweight – see above, the opposite of “Overweight”.

Reduce – the shareholding should be lower than the relevant index “weight” or the previous holding.

Sell, Strong Sell

These recommendations, being the most negative, should be interpreted literally. They suggest you sell out of the particular company and rebalance your portfolio so that it does not include the particular company subject to a sell recommendation.

Summary

Well I hope this has helped you understand the broker views and that particular section on The Morning Call makes more sense now!

It may be worth reviewing a few of your holdings to see if your weightings and performance is in line with what most brokers would recommend (something we can help with?).

However please note that investment recommendations are like legal advice. Different lawyers give different legal opinions. Different financial institutions have different recommendations on the same company. What is important to consider is the consensus movement in those recommendations. At the end of the day a stock’s price with either rise, stay constant or fall. The views of other brokers are only an indication of future price movements – ultimately it is for the markets to set the price based on the liquidly and demand for the stock.

This blog has been developed from questions and suggestions from investors so please keep the comments coming and let us know if there is anything else you would like covered on a blog post via the comments below or email me on gstainton@css-investments.com.

Comments

  1. Brian Read says:

    Very useful to have this explanation, some items I thought I knew, but I was not quite correct.Thanks

  2. C Tranmer says:

    Very helpful this clarifies a lot of things. Thank you

  3. Sampat Sethia says:

    Further clarity in understanding. Very useful. Thanks.

  4. Vrajlal Sheth says:

    Very useful literature

  5. George Stainton says:

    Thank you very much for your feedback. We have had a few requests about broker recommendations so I’m glad it has provided some clarity.

  6. Paulo Jacinto says:

    never was quite sure, that will help.Thank you

  7. DAVID GREGORY says:

    Useful comment although in the end one needs to consider ones own objectives in investing and the timing in relation to the market position at the time.

  8. Julien says:

    I have found this blog very helpful, so full marks to Adam for initiating it and continuing to push it.
    Julien

  9. Mariam says:

    Very instructive and useful. Thanks a lot.

  10. Paul Stone says:

    Very helpful. Clarified several recommendations which I did not fully understand. Thanks.

  11. W J Badham says:

    Very useful indeed.

  12. Ian Brailsford says:

    Thank you very informative

  13. Bob says:

    Please could you add a definition of “Corporate” to the list?

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