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THE FRIBBLE
Monday, November 1, 1999

Understanding Upgrades/Downgrades

By T. Allen Grider

I joined the Fool in March 1999. Being new to stock market investing, I knew I faced a long learning curve. I encountered many new terms (read "jargon" for the technical types). For a long while I was confused by the market analysts issuing upgrades/downgrades of stocks. It has taken me a while to understand what the terms "Strong Buy," "Buy," "Hold," "Moderate Sell," and "Strong Sell" actually mean.

At first I thought great, when a market analyst upgrades a stock to "Strong Buy," I should buy it. And, when a market analyst downgrades a stock to "Strong Sell," I should sell it. But, the terms "Buy" and "Moderate Sell" confused me. Does "Strong Buy" mean buy today? Does "Buy" mean buy tomorrow (or next week)? And what is the difference between "Moderate Sell" and "Strong Sell"? See my confusion?

Then I noticed that a lot of the analysts who issued these upgrades/downgrades mostly worked for brokerages that also market mutual funds. Putting all this together with what I learned in The Fool's School and The Truth about Mutual Funds, I think I can finally define these terms:

When an analyst says "Strong Buy," he actually means, "Many of our funds have just acquired a large position in this stock and we need a large upswing to improve our quarterly returns."

When an analyst says "Buy," he actually means, "Our funds have had this stock for a while and it's down a little. Bid it up so that we can improve our quarterly returns."

When an analyst says "Hold," he actually means, "We have very little of this stock in our funds, so we do not care what happens to it."

When an analyst says "Moderate Sell," he actually means, "We sold this stock from our funds yesterday. Please sell it down some more so we can buy it back cheap."

When an analyst says "Strong Sell," he actually means, "We are uncovered shorting this stock. Please sell it down quickly so we can improve our quarterly returns."


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