Analysts estimates of earnings are quantitative and based on what the analyst thinks the profitability of the company is going to be. In addition to this estimate, the analyst will give a qualitative recommendation on what you should do with this stock – Buy/Hold/Sell. The number of analysts giving out the following recommendations are multiplied by the respective scores for Buy, Sell, etc. to derive an aggregate score. Therefore, if all analysts call for Strong Buy, the aggregate score is 1 and if all Sell, 5.
- Strong Buy: 1
- Buy: 2
- Hold: 3
- Underperform: 4
- Sell: 5
Stocks that have high recommendations by analysts do better than those that have low recommendations.
Tests have also shown that stocks with analyst recommendation upgrades outperform.