The Big Picture - Hold Rating Means Avoiding a Buy Rather Than Being Neutral

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Jun 08, 2023, 10:40 ET

AnaChart database uncovers the hidden implications of hold ratings in stock analysis.

NEW YORK, June 8, 2023 /PRNewswire/ -- Stock analyst ratings play a significant role in shaping investment decisions. However, a new analysis utilizing the AnaChart database, conflated with insights from academia, reveals an intriguing trend often overlooked by investors. The hold rating, commonly seen as a neutral stance, is frequently utilized by analysts to disassociate themselves from a stock that indicates a negative sentiment without severing ties with the company.

AnaChart - Analyst Stock Rating Distribution Overall 2000-2023

AnaChart, the leading provider of stock price targets and rating data available to the public, has compiled an extensive dataset comprising approximately 750,000 ratings. This dataset, meticulously filtered to remove duplicates and corrupt ratings, sheds light on the prevalence of hold ratings in the marketplace. Analysts categorize the ratings into three groups to simplify research: buy, hold, and sell.

The AnaChart database reveals that analysts issue hold ratings far more frequently compared to sell ratings. The data indicates 188,329 instances of maintaining a hold rating, vastly outnumbering the 28,490 occurrences of sticking with a sell rating. Moreover, when analysts decide to downgrade a stock, they often opt for a hold rating rather than a sell. The dataset reflects 63,060 buy-to-hold changes, contrasted with 2,587 buy-to-sell changes.

Supportive Academia Findings

Insights from academia support these findings. A study by Brad Barber and a 2005 Wall Street Journal article highlighted the scarcity of sell ratings. These studies suggest potential conflicts of interest, such as preserving relationships with company management, as one of many factors that deter analysts from issuing sell ratings. This trend suggests hold ratings often serve as a softer alternative to what we regard as sell ratings, enabling analysts to express negative sentiments while maintaining relationships with the companies they evaluate.

Furthermore, research by Niklas Karlsson, George Loewenstein, and Duane Seppi suggests that analysts may have a cognitive bias toward buy or hold ratings since they seek to avoid the discomfort associated with the negative implications of sell ratings. The outcomes imply that hold ratings may bear more negative indications than what appears on the surface.

In an address to the timing of rate changes, AnaChart's analysis found that when analysts lose faith in a stock, they frequently switch to a hold rating, often accompanied by a stock price decline. AnaChart encourages research collection and conversation initiation that delivers trust and transparency aligning with this new data.

"We invite researchers to delve deeper into the fascinating realm of stock analyst ratings and price targets using the extensive AnaChart database. Our rich and accessible dataset, encompassing a vast array of stock price targets and ratings for the last twenty years, presents an invaluable opportunity to uncover new insights and expand our understanding of the intricate relationship between analysts, investor behavior, and market dynamics."

• Joseph Kalish, CEO of AnaChart

Conclusion

While analysts have not undermined the significance of the sell rating, it is crucial to highlight the nuanced role hold ratings often play in financial analysis. Analysts frequently lean towards hold ratings due to various pressures, which can subtly shift the apparent meaning of this rating. In conclusion, financial consultants advise investors to interpret their hold ratings with awareness of this potential bias and consider them possible indications that it is time to sell.

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SOURCE AnaChart