Investors looking to make the right moves at the right time rely on buy ratings, which are suggestions on how to approach stock shares when you’re considering buying, selling, or holding your portfolio’s assets. Ratings are a simple guide on where analysts believe a certain stock’s fortunes are headed.
The meaning of a buy rating has been fairly obvious since the early days of financial analysis. However, as the stock market grew exponentially in the latter half of the 20th century, the rise of research firms and investment banks helped set up an alternative designation: “overweight” ratings.
The ratings have similar meanings. Both support a positive outlook for the investments in question. The main difference in the overweight vs. buy rating discussion is the “arena” in which they happen — in the context of daily trading activities or long-term portfolio management.
Gorilla Trades offers a comparison of overweight vs. buy ratings. In addition to learning the differences, you’ll see how investors should interpret each one and what separates a solid recommendation from a more questionable pick.
What Is a Buy Rating?
The traditional rating tiers for trading stocks are “buy,” “hold,” and “sell.” The meanings of these designations should be fairly clear; they’re indications of how analysts believe investors should handle their shares right now.
A “buy” rating for a given commodity means investors should obtain more shares of it as soon as they can. Analysts believe the stock’s value will increase in the future. As such, investors should pick up some shares in the stock now before the value rises.
In today’s market, analysts offer “strong” buy ratings as well. These imply a sense of urgency, indicating that you need to get in on this stock right now because a significant rise in value is just around the corner.
A strong buy rating implies that the stock’s target price will increase by as much as 50% over the next 12 months. At the other end of the scale, there’s also a corresponding “strong sell” rating.
What Is an Overweight Rating?
When it comes to overweight vs. buy ratings, it’s important to understand that buy ratings are based on transactional trends, whereas overweight ratings relate to the proportion of a given stock in investors’ portfolios. The two ratings are similar but not exactly the same.
When an analyst issues an overweight rating, they believe a company’s stock price will rise in the future. The core definition is that analysts think investors should increase their exposure to the stock beyond what current index benchmarks show.
For example, let’s say you own shares in Acme Supplies that equal about 4% of your overall holdings. However, a stock analyst predicts success and a growing market share for Acme and suggests that you up your holdings to comprise 8% of your portfolio. That’s an overweight stock. The implication is that investors should buy more shares.
It should be noted that all ratings, including overweight stocks, are ultimately subjective — or at least very educated guesses. Not all indexes or analysts will agree the stock is overweight and may have different benchmarks for evaluating stocks.
Overweight vs. Buy Rating: How the Two Are Related but Not the Same
One way to understand the distinction between overweight and buy ratings is that all overweight ratings are buy ratings, but not all buy ratings are overweight. Both ratings reflect positive outlooks on a company’s future. The difference in overweight vs. buy ratings is the context behind the two.
Overweight ratings are made in consideration of investors’ overall portfolios. They usually come with a specific benchmark that shows why investors should allocate more assets to the stock so it takes up a larger percentage of their holdings.
Buy ratings are more general recommendations geared toward active traders. Analysts believe investors should pick up stocks with a buy rating. However, they don’t necessarily suggest how much proportion the company should have in your portfolio — only that you should get a few shares at current prices whenever you can.
It’s fair to differentiate these ratings according to investors’ approaches to their holdings. Those with a long-term mindset probably pay more attention to their overall portfolios than immediate opportunities.
More active traders, in contrast, may be attuned to short-term gains, so they’re more responsive to straight-up buy ratings. However, this factor could be overgeneralizing. Neither rating is exclusive to a specific investor stance.
What Is a Good Buy Rating?
Every financial analyst has different benchmarks. Their ratings are speculative, even when informed by valid data. In the matter of overweight vs. buy ratings in active markets, it may be difficult to discern which buy recommendations are solid and which are shaky at best. Here are some qualities to look for in buy ratings for stocks today.
Strong Fundamentals
Solid financial metrics should always accompany a buy rating. Growth, profitability, and expansion figures should be consulted in every case.
Deeper dives on fundamentals, like the price-to-earnings ratio and return on equity, should support the recommendation as well. Respectable analysts always make close examinations of financial reports, current trends, market share, and competitors’ positions when forecasting growth.
Unbiased Stance
Even though buy ratings are expressions of opinion, an analyst should be free of any personal biases and conflicts of interest. Companies do what they can to gain influence on the analytic community. The best stock analysts keep strict objectivity and deflect offerings of personal profits or gains.
Reasonable Target Price
Investors rely on target price evaluation to time the best moments for entering and exiting stock positions. When analysts issue buy ratings for certain stocks, they should set an achievable target price in light of market conditions and company fundamentals. Many analysts focus on target prices that can be realistically met in the next 12 months.
Clear Explanations
Financial analysts must be honest about their trading strategies and approach to the marketplace. Any rating pronouncement they make should have a clearly written, detailed narrative describing the factors behind their decisions. In a competitive industry that’s subject to fluctuation, a solid and well-reasoned thought process is critical.
What Is a Bad Buy Rating?
A bad buy rating, to put it bluntly, reflects the opposite of all those qualities. In particular, bad buy ratings have at least one of the following flaws — often more.
Weak or Shallow Justifications
Some analysts offer insufficient grounds for recommending a buy position. They may only use the most superficial, accessible metrics to back them up. Any buy rating that isn’t attached to deeper metrics, robust data, or current information should fall under question.
Conflict of Interest
Analysts are investors, too. Whatever recommendations they make must be free from internal influence and conflicts of interest. It’s not always a bad-faith move to recommend a stock in which the analyst holds shares.
However, the analyst should not stand to gain something strictly from their recommendations. Such gains can include payoffs and close ties to company management.
Unrealistic Price Targets
Any price targets the analyst recommends should be plausible. Target prices that are unreasonably ambitious or that defy current market conditions must be taken with a grain of salt — or not taken at all.
No Transparency
Ratings not sufficiently explained with transparent methodology or data should raise a red flag. If the analyst doesn’t clearly explain the process behind their ratings, you should back out of the position or find reliable advice from more qualified advisors.
Gorilla Trades: Clarity on Overweight vs. Buy Ratings
Gorilla Trades has steered hundreds of investors through the complexities of overweight vs. buy ratings. We can help you, too, with our time-proven stock-picking method. You can find out more through our risk-free, 30-day trial that offers free stock alerts and advice for one mont