How to Use Analyst Ratings to Your Trading Advantage

Correctly identifying a contrarian bullish or bearish signal is key

Digital Content Manager
Feb 22, 2024 at 2:56 PM
facebook X logo linkedin


Here at Schaeffer's, we often cover analyst ratings and the impact they can have on the affected stock. Just this week, for instance, we looked into how shares of fast food giant Wendy's (WEN) and blue chip Caterpillar (CAT) responded to downgrades, so now is as good of a time as ever to dive deeper into what analyst ratings truly are, and what they mean.

An analyst rating is a recommendation to buy, hold, or sell a given stock, based on multiple factors -- such as a company's earnings and revenue history, product pipeline, share price performance, and more. These ratings can range from bullish ("strong buy" and "buy"), to neutral ("hold"), to bearish ("sell" and "strong sell"). As a whole, a stock's analyst ratings configuration can tell us at a glance how Wall Street feels toward that particular name.

Analyst ratings are changed via publicly issued upgrades and downgrades, which are often sparked by corporate events (such as product launches, shareholder meetings, or earnings reports). However, for various reasons, analysts can be slow -- or outright reluctant -- to change their ratings in response to a stock's evolving price trend.

The Contrarian Take on Analyst Ratings

Given that Wall Street analysts are the "experts" on the stocks they rank, it can be tempting for investors (and particularly those who are newer to trading) to defer to the big brokerage firms' bullish or bearish opinions. However, at Schaeffer's we often take a contrarian approach.

That doesn't mean we blindly bet against Wall Street analysts, though. Instead, we look for situations where a stock's price action appears to be out of sync with analyst ratings, which can create tradable opportunities.

Identifying a Bearish Signal from a Contrarian Perspective

When a stock is trending lower and underperforming on the charts, you would expect to see a relatively higher percentage of "hold" and "sell" ratings from analysts. So, when we spot a downtrending stock with a high proportion of "buy" and/or "strong buy" ratings, we'd consider that stock to be extremely vulnerable to future downgrades, as analysts eventually adjust their ratings to reflect the poor price performance.

Since downgrades often result in fresh selling pressure for the affected stock, the prospect of future bearish analyst notes hints at additional downside ahead. When combined with a thorough review of other key technical, fundamental, and sentiment indicators, a high number of "buy" ratings on a lagging stock can be an effective contrarian sell signal.

Identifying a Bullish Signal from a Contrarian Perspective

By contrast, a stock that is outperforming on the charts, but mainly sports "sell" or "hold" ratings from analysts, would represent a bullish contrarian opportunity. As analysts gradually respond to the stock's positive price trend with upgrades, those research notes can draw new buyers to the stock, effectively perpetuating its uptrend. 

In summary, the key to correctly identifying a contrarian bullish or bearish signal relies on a thorough analysis of the stock's price action within the context of the prevailing sentiment among traders and analysts. Whenever a strongly uptrending stock is lacking in "buy" ratings, or a declining stock still carries a glut of "buys," savvy contrarians can take advantage by betting that analysts will eventually be forced to capitulate to the reality of the stock's price performance.

 

Target Effortless Triple-Digit Gains Every Sunday Evening For Life!

This is your chance to triple your profit potential on Sunday evenings, without spending all your free time watching the market.

On Sundays, as a Weekend Plus subscriber, you’ll get up to 6 trades every Sunday, each targeting gains of 200% or more.

Start targeting gains like the ones our subscribers have seen recently, including:

213.3% GAIN on AutoNation calls
100.0% GAIN on Monster Beverage calls
100.4% GAIN on Walgreens Boots Alliance puts
100.4% GAIN on ON Semiconductor calls
257.7% GAIN on Dell calls

101.0% GAIN on Apollo Global Management calls
103.6% GAIN on JP Morgan  Chase calls
105.3% GAIN on DraftKings calls
101.3% GAIN on Airbnb calls
203.0% GAIN on Shopify calls
102.0% GAIN on Cboe Global Markets calls
100.9% GAIN on Boeing calls
102.1% GAIN on Microsoft puts
102.3% GAIN on First Solar calls
101.5% GAIN on PulteGroup calls
101.0% GAIN on Apple calls
209.4% GAIN on NXP Semiconductors calls
100.8% GAIN on Uber Technologies calls
100.4% GAIN on Academy Sports and Outdoors puts
102.2% GAIN on Trade Desk calls
100.8% GAIN on DoorDash calls
100.0% GAIN on Camping World Holdings puts
100.0% GAIN on Cboe Global Markets calls
100.2% GAIN on C3.ai calls
238.5% GAIN on Oracle calls

 
 
 


 
 

Rainmaker Ads CGI