Analyst Recommendations
Investment- and trading-related recommendations and advice given by financial analysts and investment researchers
What are Analyst Recommendations?
Analyst recommendations are recommendations and advice given by financial analysts and investment researchers to their clients with regards to what assets to invest in and what assets not to invest in. Financial analysts usually conduct extensive research on a specific asset class and also on the overall state of the financial markets before issuing a recommendation.
Modern financial markets are incredibly diverse, with different asset classes behaving differently at different times. For example, fixed income markets behave very differently from equity markets. Furthermore, even within fixed income markets, the market for sovereign debt behaves very differently from the market for corporate debt. As a result, financial analysts usually specialize in only one or two asset classes.
Key Highlights
- Analyst recommendations are recommendations and advice given by financial analysts and investment researchers to their clients with regards to what assets to invest in and what assets not to invest in.
- Modern financial markets are incredibly diverse, with different asset classes behaving differently at different times. As a result, financial analysts usually specialize in only one or two asset classes.
- Analyst recommendations fall on a spectrum ranging from a “Strong Buy” to a “Strong Sell.”
Types of Analyst Recommendations
Analyst recommendations fall on a spectrum ranging from a “Strong Buy” to a “Strong Sell.” It is shown below:
Strong Sell
The analyst expects the price of the asset to fall in the future and strongly recommends investors sell their holdings of the asset. In addition, the analyst recommends that investors take leveraged short positions in the asset.
Sell
The analyst expects the price of the asset to fall in the future and recommends investors sell their holdings of the asset. A “Sell” is a weaker recommendation than a “Strong Sell” and does not usually imply a recommendation for a leveraged short position.
Hold
The analyst expects the price of the asset to remain unchanged in the future and recommends investors not to change their existing stance on this asset. A “Hold” recommendation is the analyst telling investors that there is no new information that can substantially affect the price of the asset.
Buy
The analyst expects the price of the asset to rise in the future and recommends to investors to increase their holdings of this asset. A “Buy” is a weaker recommendation than a “Strong Buy.”
Strong Buy
The analyst expects the price of the asset to rise in the future and strongly recommends investors increase their holdings of the asset. Investors are recommended to leverage up in order to increase their long position in the asset.
Illustrative Example
An equity research analyst analyzes the balance sheets of a business, the state of the industry, the overall state of the economy, and other fundamental measures of overall company health and come up with recommendations for investors. Consider the stock price of Apple (AAPL). An analyst may issue a HOLD recommendation in August 2017. The analyst then changes his recommendation to a BUY recommendation in February 2018 after Apple’s stock price falls below $160.
Afterward, the stock price rises to $180, at which point (March 2019) the analyst changes his BUY recommendation into a SELL recommendation. In May 2019, after Apple share prices fall close to $160, the analyst changes his SELL recommendation into a STRONG BUY recommendation. In October 2018, after Apple share prices cross $230, the analyst changes his STRONG BUY into a STRONG SELL. In January 2019, the analyst again changes his STRONG SELL into a STRONG BUY recommendation.
More Resources
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:
