Nothing beats doing your own homework when it comes to trading and investing. However, strong buy stocks are recommendations from wall street analysts that are among the most bullish. Wall street analysts can be wrong but often times their opinions are highly respected.
Banks and research firms hire analysts to speak with corporate executives, research specific companies, give an opinion on if the stock is overvalued, undervalued, or fairly valued. That said, stock analysts will also make forecasts, give buy, sell or hold recommendations, and give a price target on where they think the stock should be trading at.
Now, different firms will issue various types of stocks ratings, they range from: buy, outperform, overweight, strong buy, neutral, hold, equal-weight market perform, sell, underweight and under perform.
The strong buy stock rating is among the most coveted.
For example, at Raymond James, a strong buy rating typically implies that the stock will produce a total return of double digits and outperform the S&P 500 over the next six months or so.
At Needham & Co., a strong buy rating implies that the stock could produce total returns in the mid double digits over the next 12 to 18 months.
A team of analysts usually cover a sector together, for example, retail. They issue their reports along with a recommendation and price target. The report is usually distributed to clients of the bank. However, the rating information and price target, becomes readily available after it’s released.
A company like Apple has over 20 analysts covering its stock. It’s unlikely that the stock will overreact to an upgrade or downgrade because of its market cap.
Analysts will typically make changes to their outlooks after an investors day meeting, industry conference, and/or quarterly earnings statement release.
Strong Buy Stocks And Its Catalysts
Now, there are a number of reasons why an analyst will give a strong buy rating. Here are some of them:
- Seasonal trend, for example retail stocks during Christmas time.
- Increasing gross profits
- Strong cash flow
- Strong sales and EPS numbers
- A Return on invested capital greater than 10%
- A bullish outlook on the sector
- The stock appears cheap based on a valuation model
- Share buyback program
- Faith in management and their ability to execute
- Company guidance is higher than expectations
- Favorable court or government ruling
- Business coming out of a slump
- Economic conditions are improving
- Growth drivers
Now, those are just some of the reasons on why an analyst might give a stock a strong buy rating.
Source: Business Insider
Of course, a strong buy rating does not always mean that the stock will rise the day the report is released or if it will ever reach its price target. The analysts are just offering their opinions. But its the institutions and other players in the market that dictate how high or low a stock will trade.
Websites like tipranks.com actually rank analysts on how well they perform.
Trading Strong Buy Stocks
Now, imagine an investment bank coming out with the most bullish sounding report on the stock. The stock is trading at $50 and they gave it a street high price target of $85.
The stock is set to gap up $2 on the open on low volume. Most novice traders will buy the stock on the open, but that might not always be the smartest move.
You see, just because a stock gets a strong buy recommendation there is still more research you need to do.
Questions you should be asking:
Who is the analyst? and What is their reputation covering this stock or the sector?
Is the analyst’s firm respected around the street or is it just some blogger trying to make a name for themselves?
Is the analyst’s research offering something new and original?
Sometimes a stock can get a strong buy rating but the price target might be at or even lower to where the stock is trading at. Despite the bullish rating, the low price target makes it less bullish and even slightly bearish. For example, lets say the stock is trading at $50 and it receives a strong buy rating with a price target of $45. You can see how that doesn’t come off across as that bullish.
What’s important is to listen to the narrative and see how that matches the markets sentiment. Analysts have access to much greater resources than we do as individual investors. It’s important to read and listen to their reports. But ultimately, you’ll need to come up with your own conclusions and make choices that best fit your interests as an investor.