Why are sell-side analysts important in investing?
You may have heard commentators on the financial news say things like "analysts are projecting $1.00 in earnings per share from Bank of America." Analyst estimates are a product of sell-side analysts that follow a company. Earnings and revenue (and other metric) estimates from several sell-side analysts who cover the same stock are averaged to come up with a number known as the consensus estimate.
Analysts can also move stocks based on their opinions. And this comes in a few forms. Specifically:
- If an analyst increases or decreases their price target on a stock, that stock can move higher or lower in reaction to the new target.
- Analysts often assign ratings to the stocks they cover to convey their overall opinion. For example, many sell-side analysts use the traditional "buy, sell, hold" designations, while others add extreme categories like "strong buy" or "strong sell" to convey when they have a particularly high level of conviction. If a rating is increased, you might hear that an analyst "upgraded" a stock, and it can often move higher. Conversely, if a stock gets "downgraded," especially by a closely followed analyst, it can cause the share price to take a hit.
- If a stock misses the consensus estimate of analysts when it reports quarterly earnings, it can be a negative catalyst. On the other hand, if it reports earnings that exceed the consensus, it can cause a stock to move higher.
How can investors benefit from sell-side analysts?
It's generally not a good idea to buy, sell, or short a stock just because of a sell-side analyst's opinion. However, sell-side analysis can be a great tool that investors can use to read different opinions on a stock, and to find points of view they haven't considered. Many brokers offer third-party research reports to their clients, and these are examples of sell-side analysis that can be extremely useful in finding attractively priced stocks to invest in.
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