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Buy, Sell Or Hold? What You Need To Know About Analyst Reports

Written by The Inspired Investor Team | Published on April 19, 2024

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There is no shortage of opinions out there on investing. Getting different perspectives is important, but it can be particularly beneficial to consider views backed by research, such as the ones you’ll find in analyst reports.

Research or security analysts are professionals who break down complex financial data and write opinions on publicly traded companies to explain why those stocks may or may not be attractive to investors. These reports are valuable resources used by large institutional investors like portfolio managers and pension plans. Some of this research is often available to individual investors, too.

Here’s how you can elevate your investing approach using analyst reports.

Expand your research

The more research you can do when it comes to the companies you invest in, the better. One advantage analysts have over the average investor is access, according to Phillip Huang, a Portfolio Advisor focusing on U.S. equities with RBC Dominion Securities’ Portfolio Advisory Group (PAG).

Analysts meet with executives and participate in conference calls to get more specific information and context from the companies they’re following. Many analysts check distribution channels or do site visits to see companies in action to better understand how well they’re being run. “That’s unique data you can’t find anywhere else,” he says.

The insights shared through these reports can help you understand how the company makes money and alert you to internal and external threats that could affect the company’s performance, Huang says. It’s one of several reasons he believes reports should be part of your research process, especially if you want to test your idea and uncover things you may not have thought about.

Look beyond the ratings

Analyst reports are arguably best known for their ratings—buy, sell or hold—and target prices. As tempting as it may be to rely solely on buy ratings and price targets, Huang urges caution. “There are many shades of buys,” he says. “Just because a research report has a buy rating on it, it isn’t a guarantee that the stock will work over the short or long term.”

Buy, sell and hold ratings are meant to be used when comparing one company to another in the same sector, Huang adds. For example, they’re evaluating tech companies against their peers and not necessarily against the broader market.

One of the few times you might be able to rely on a rating alone is when it has a “sell” rating—especially if you’re just looking for ideas on what companies to spend time researching, according to Julia Xu, an associate advisor with the RBC Wealth Management PAG. “That’s the simplest thing you can do to avoid outsize risks,” she says. A PAG won’t include a stock in its portfolios that doesn’t have at least one “hold” rating across the research providers accessed by the team. She adds, if you’re looking for companies to short, then you may still want to consider doing additional due diligence.

Before jumping into the market because an analyst thinks a stock price will rise, you need to know what’s behind that target, Huang notes.

Analysts can come to a price target in many ways, but they often look at popular metrics, such as price-to-earnings ratios – a number that can indicate how cheap or expensive a stock might be relative to its history and peers – to see if the business is trading where they think it should be. It’s also a sign the analyst has a high level of confidence in their view of the stock. Price targets often show a modest increase in growth over the current share price, although some targets could show larger gains. Of course, just because an analyst thinks the price will rise doesn’t mean it will.

Huang says it’s the report’s written analysis that offers investors the greatest value. “An analyst report contains a lot of data points they aggregate for you,” he explains, referring to the charts, valuations and earnings history you can find in a typical report. “It’s the analysis and the data that goes behind reaching stock rating and price target that matters more.”

An impartial analysis

If you’re reading an analyst report for the first time, you might wonder whether it’s an opinion you can trust. While financial institutions and brokerages pay to produce the reports, analysts and employers go to great lengths to ensure opinions are impartial and avoid potential conflicts of interest.

For instance, most brokerages have strict rules prohibiting analysts from owning shares in the stocks or sector related to the companies they cover. Likewise, if an analyst works for a financial institution that has a banking relationship with a company, analysts and the bank are prohibited from sharing information with each other. Of course, analysts are human, so there is always a risk that unconscious bias can affect their views, Huang says. Therefore, it helps to consider analyst opinions by consensus, which shows the average rating and price target for the company across all those covering the stock.

Investors themselves also need to be mindful of how their own biases might influence how they read an analyst report. “One of the most important things to consider is, what are you using this report for?” Xu advises. You should read a report with an open mind, not one that’s already made up.

Ready to get reading?

RBC Direct  Investing clients can access analyst reports by entering a stock symbol in the search field to see detailed quotes. Once on that page, you can access some of the latest reports and analyses, including consensus ratings, under the “Research” tab.

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© Royal Bank of Canada 2024.

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