The stock market is often a gamble. Analysts give their opinion of the future performance with ratings underweight, overweight, or performing as expected in company projections given by management and analysts alike.
If an analyst believes they have been wrong about previously giving stocks poor guidance for shares prices due to industry trends like steady streams of positive news and good earnings announcements they may choose to change those expectations.
One of the most important jobs in the investment firm is that of a stock analyst. Analysts are charged with evaluating how well companies invest and make decisions about stocks, bonds, or other securities.
Stock analysts provide more than just buy sell ratings for their customers they evaluate many different factors to determine if it’s a good time to purchase shares or not.
- An overweight rating on a stock typically means that it should be given more attention than the benchmark’s current weighting for that particular company.
- Being an overweight stock means that an equity analyst believes the company’s stock price should perform better in the future.
- One way to understand a company’s rating is by looking at the time horizon and risk tolerance of an investor.
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Stocks that are over weighted reflect analyst expectations for an increase in the company’s stock price. This is important to note, as some analysts may be comparing a company against stocks with lower or higher valuations than it currently trades at.
Investors should always consider this benchmark when reading equity ratings and make sure they understand whether their chosen investment will perform better than other investments if the selected one outperforms its peers over time.
With the S&P 500 as a benchmark index, an overweight rating means that you are recommending greater weighting for the stock.
For example, one might be looking to buy 100 shares of Company XYZ but only have $5,000 available in their account due to cash flow concerns and would thus want more sway on how much they could invest by having it count towards other funds within your portfolio.
A stock with an underweight rating means that the company generating a below-average return compared to its benchmark index. As such, it should receive a lower weighting than what is currently applied for said measurement.
If you are an investor, do not invest in a stock with an underweight rating. You’ll be left wanting better returns and will end up having to buy more stocks just to keep your portfolio afloat.
If a stock has an equal-weight rating, it means that the analyst feels like its performance will be similar to or in line with the benchmark index.
Overweight and Price Targets
Though a high weighting might be interpreted as the stock’s doing well, it usually means that market participants have judged its price should go up.
Investors are more likely to invest in companies with high ratings on the stock market. This is because they believe that their risk of profitability will be higher than if they invested elsewhere and there’s a better chance for them to see increased earnings.
Analysts predict that the stock for company ABC will appreciate in 12 months’ time. Their opinion is based on recent data, which forecasts a 25% increase and FDA approval leading to an increased market cap of $175 per share over the next year.
Criticisms of Overweight Ratings
A concern about overweight ratings is that equity analysts don’t provide specific guidance as to how much of the stock should be purchased by investors. One investor might interpret an overweight rating as a sign to buy 1,000 shares while another might take it and only purchase 10 shares instead.
Investing in a company that has an overweight rating can be risky given the portfolio size of the stock. If this is done, it’s important to know what other stocks are being considered as well so that they’re not all concentrated into one industry or sector and risk becoming unbalanced.
Investors who buy only one type of stock are taking a big risk. If the analyst is wrong and prices go down, they stand to lose more money because there’s an overexposure to just that single investment.
The overweight rating can be useful for investors looking to balance their portfolios. Perhaps if you have a portfolio heavy with technology stocks, an additional stock from the same industry may not make sense based on your risk tolerance level.
Investors should take the time to investigate how an analyst conducts their recommendations, determine what they’re using as a benchmark and whether they’re long-term or short-term investors.
They’ll be able to see if that overweight rating is just a temporary fad or something more permanent in nature.
Some investors may be willing to hold a stock for as long as they live. Others are less committed and might want to sell the stocks when they need cash or their time horizon changes.
The analyst’s rating should reflect an awareness of these factors, such that it is not too low if someone wants only short-term exposure but high enough if there will be no foreseeable liquidity event insight.
Three- and Five-Tier Rating Systems
Stock analysts are tasked with performing research and issuing recommendations, which often come in the form of a rating. A good analyst will not only be able to tell you about their company’s findings but also what other firms have said.
The three-tiered rating system of “buy,” “sell,” and “hold”— which offers guidance on what you should do with a stock—is easy to remember because it uses instructions that are clear.
Some analysts don’t use “overweight.” Instead, they may opt for more aggressive terms like “outperform” or “accumulate.” Some firms have adopted systems with five tiers instead of three.
According to a five-tier rating system, overweight is nestled in between hold and buy. This means that the analyst likes this stock but feels they need more conviction before issuing it with an outright “buy” recommendation.
We all know that some investors are shying away from clear “buy” or “sell” advice. But it can be even more confusing when a three-tier rating is given: Underweight, Equal Weight and Overweight. In this case, it’s fine to view the word ‘overweight’ as meaning “buy.”