Warren buffet does not care about market price unless its very cheap. He never buys stock to sell at a gain, he buys stock to own businesses that produce cash flow.
To understand analyst ratings you have to understand the job and objectives of the analyst. Analysts use industry experience/connections and financial valuation to identify stocks that are undervalued on a fundamental financial basis. They will often give a price target, which is usually close to the fair value of the firm in one years time. Sometimes the market re rates the stock within the year closer to actual value, sometimes it does not.
Analysts aim to find and expose value creation "stories" that ring true with funds managers and high net worth clients and this creates brokerage revenue for the firm. Also analysts can attract investment banking business, by giving the company exposure in hope that the company will chose their firm for any corporate finance business in the future.
The "Hold" rating happens when a stock that was previously initiated at a buy, is now almost fairly valued for whatever reason. The stock now has a predicted total shareholder return of ~10% over the next year and if you are holding allot of stock, to sell now would a) incur capital gains b) drive down the price and c) throw away the possibility of further out performance by a stock with a track record.
Of coarse there are many many other ways a stock could goto a "hold" for example if the stock tanks 50% on sentiment, and the immediate future looks bleak, but its still undervalued fundamentally. If it was a buy at $1 and nothing in the future cash flows have changed, it cant be a sell at 50c.
A major reason why analysts seldom put a stock on "Sell" but do put them to "hold" when bad times hit, is that a Sell rating will impact the share price even more to the downside and put the analyst into the bad books with that company. The analyst could get a reputation in the industry as someone you don't want to cover your company because you could get down graded to a sell!
The job of an analyst has very delicate politics involved within his/her firm and with external parties. It is not an easy job by any means to balance all the stakeholders! Many analysts have been led astray in the past, and it takes a judge of character to identify what analysts are going to be the most reputable in their research.
So as a retail investor, the best bet is to read analyst reports, but ignore recommendations! Analyst reports are almost always very high quality financial analysis and you can draw your own conclusions from the legwork that has been done by somebody else.
To understand analyst ratings you have to understand the job and objectives of the analyst. Analysts use industry experience/connections and financial valuation to identify stocks that are undervalued on a fundamental financial basis. They will often give a price target, which is usually close to the fair value of the firm in one years time. Sometimes the market re rates the stock within the year closer to actual value, sometimes it does not.
Analysts aim to find and expose value creation "stories" that ring true with funds managers and high net worth clients and this creates brokerage revenue for the firm. Also analysts can attract investment banking business, by giving the company exposure in hope that the company will chose their firm for any corporate finance business in the future.
The "Hold" rating happens when a stock that was previously initiated at a buy, is now almost fairly valued for whatever reason. The stock now has a predicted total shareholder return of ~10% over the next year and if you are holding allot of stock, to sell now would a) incur capital gains b) drive down the price and c) throw away the possibility of further out performance by a stock with a track record.
Of coarse there are many many other ways a stock could goto a "hold" for example if the stock tanks 50% on sentiment, and the immediate future looks bleak, but its still undervalued fundamentally. If it was a buy at $1 and nothing in the future cash flows have changed, it cant be a sell at 50c.
A major reason why analysts seldom put a stock on "Sell" but do put them to "hold" when bad times hit, is that a Sell rating will impact the share price even more to the downside and put the analyst into the bad books with that company. The analyst could get a reputation in the industry as someone you don't want to cover your company because you could get down graded to a sell!
The job of an analyst has very delicate politics involved within his/her firm and with external parties. It is not an easy job by any means to balance all the stakeholders! Many analysts have been led astray in the past, and it takes a judge of character to identify what analysts are going to be the most reputable in their research.
So as a retail investor, the best bet is to read analyst reports, but ignore recommendations! Analyst reports are almost always very high quality financial analysis and you can draw your own conclusions from the legwork that has been done by somebody else.
