June 1 | 5 min read
In season 2, episode 21 of “Friends,” Monica invests in a stock because its name matches her initials. Thanks to modern investment intelligence platforms like Atom Finance, investors can now be a bit more selective when choosing which stocks to invest in.
Having a solid investing strategy and access to investment intelligence tools can empower investors to make smarter decisions. The article below describes what analysts do, how their ratings can impact the market, and the value aggregated analyst ratings can have in an investor’s decision-making process.
An analyst's role
A side-sell analyst is a financial professional who studies an industry or company and makes estimates and predictions about its future performance.
Usually, analysts work for research companies, investment banks, or private equity firms. They write research reports and come up with metrics, including earnings per share (EPS) estimates and revenue forecasts for the quarter, fiscal year, and future years. Analysts’ individual estimates for a company’s earnings and revenues are averaged to create a consensus estimate. The consensus estimate is used as a benchmark to evaluate a company’s potential future performance.
Analysts also make specific recommendations to help investors decide what to do with a particular security. These recommendations are generally published quarterly, but they can be published more frequently—following a corporate announcement, for example.
The rating scale
Analysts look at all of the research they’ve compiled on a particular company and then come up with a simple forward-looking recommendation to buy, hold, or sell a stock.
Analysts’ ratings aren’t universal, but they generally fit into the following scale:
The potential impact of analyst ratings
An earnings surprise occurs when a company “misses” its benchmark by overperforming or underperforming.
Stocks may move in the short term based on an analyst upgrade or downgrade or in response to an earnings surprise. However, this volatility is generally short-term. A 2013 study by McKinsey & Company found that “a company’s performance relative to consensus-earnings estimates seems to matter only when it consistently misses them over several years.”
Three reasons investors should have access to analyst ratings
There are a lot of cautionary tales about relying too heavily on analyst ratings. The truth is, analyst ratings can be a valuable investment intelligence tool when used in combination with a thoughtful investment strategy and other investment intelligence tools. Specifically, analyst ratings can help investors:
Atom’s analyst ratings API
We designed an API that aggregates data from multiple sources, provides meaningful insights, and offers unique visualization options—including a chart showing how analyst ratings changed from the previous rating—to help investors get the most value from analyst ratings.
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