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Let’s face it. Wall Street loves its jargon and reading an analyst note on your favorite stock can be a major head scratcher. With earning season kicking off right now, we’re decoding Wall Street analyst speak on today’s stocks and translation.
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And let’s start with a quick definition of analyst report.
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It’s a research note that lays out an outlook on a company over the next 12 months.
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It usually includes a rating and a price target on the stock, and it breaks down risks as well as assumptions.
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It will also highlight what’s changed versus the last note and whether their estimates move up or down.
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An analyst might have a positive, negative or neutral view on a stock, but you’re going to see different ways of stating that opinion based on the point of view.
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Here, if they’re writing from the standpoint of what to do with the stock, it might be as simple as buy, hold or sell.
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Then they might write from the perspective of how much weight the stock should have in your portfolio.
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They’ll say overweight for bullish, equal weight for neutral, or underweight for bearish.
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Then sometimes they might take the view of how the stock is expected to perform versus a general market benchmark, like the S&P 500 or the stock sector.
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So for a bullish opinion, they’ll use the term outperform. For a neutral stance, it’s market perform, and for bearish, it’s underperform.
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And when they change their opinion or stance, they’ll generally say upgrade if they got more bullish or simply less bearish, or downgrade if they got bearish or just less bullish.
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If they’re starting to cover a stock from scratch or after a long pause, they will use the term initiate.
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Now let’s take a beat and break down the stock’s price target or PT as they say.
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Think of it as a simple spreadsheet output.
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Dozens or even hundreds of numbers are going to go in and one comes out.
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It’s not a promise, it changes when the inputs change.
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And most price targets are in a 12-month view unless the note says otherwise.
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And remember that they’re not trying to time the market. This is big picture, long-term thinking.
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Many times they’ll lay out a bull case and a bear case, as well as their base case.
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They should tell you their confidence in these scenarios as well as a risk.
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And a wide range of possibilities, that simply highlights uncertainty.
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Always take note of their assumptions, whether it’s margins, multiples, rates or growth drivers.
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What are the dials that move the numbers?
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Now let’s address some common misconceptions.
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Sticking with price targets, a new one doesn’t necessarily mean they’ve got a brand new thesis.
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Read why they move the target.
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And if the stock price hits that target, it is not necessarily a sell signal.
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Many times an analyst will end up chasing the stock price.
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And for timing signals, the separate field of technical analysis, that can help you out there.
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And keep in mind that one analyst rating is just that, one viewpoint.
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For a broader perspective, we track the consensus opinion by taking the average or median of all the different street views.
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And neutral, it doesn’t necessarily mean bad, sometimes a stock is just fairly priced after a run.
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Now let’s break down the bullish tells versus the bearish ones in those notes.
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On the bullish side, a raised estimate or higher price target with new facts is real fuel.
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Higher profit margins or new drivers of cash flow can be a quality upgrade.
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Cash is key, and it pays for buybacks, dividends and debt.
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And how clear is the road map for the company?
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Are the factors that matter easily identified along with milestones to note any progress?
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You want the ability to track specific things on a timeline.
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And on the bear side, watch out when an analyst lowers its estimate for key numbers or moves key milestones into the future.
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That’s saying less earnings or later, which usually deserves a lower price today.
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And if an analyst thesis hedges on one-offs or hope, that’s fragile.
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Hope is not a strategy, and fixes, they need evidence.
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And finally, if the analyst is signaling that some of the company’s vital signs are deteriorating, like users, orders or cash conversion, that means the health is slipping.
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Bottom line, don’t get too fixated on the ratings label or the target, understand the assumptions and what has changed and follow the trends.
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and never let jargon drive your decisions.
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And tune into the Stocks and translation podcast for more jargon busting deep dives. New episodes can be found Tuesdays and Thursdays on Yahoo Finance’s website or wherever you find your podcast.