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Two Methods that Analysts Use to Evaluate Stocks

July 15th, 2014

What methods to analysts use to come up with the evaluations of buy, hold, or sell recommendations of stocks, or underperformed, inline, or over performed that analysts give on stocks or companies.  They are really projecting earnings reports and changing their report figures for the EPS earnings numbers but I want to discuss how they come up with this data in terms of the bigger picture.

What are the two primary ways analysts evaluate stocks?

  1. Absolute Value
  2. Relative Value

What are absolute value and relative value?

Absolute value is if you evaluate the stock and negate the market and negate every other stock out there. You can think of it like taking a stock and putting it all on its own. Then you would look at how it would perform or how it would survive in that environment. You can think of absolute value as the stock being absolutely all on its own.

The relative value is how the stock or the company relates to other stocks or companies in its sector or in its industry. For instance, if you were to look at Facebook you would look at face book in line with how it’s doing compared to the market, how it is doing compared to twitter, LinkedIn, or any other social media stocks.  You could even compare it to other technology stocks. Then you are getting a relative value of how the stock is performing or doing.

If the stock is over performing the other companies than it should be doing pretty well and will probably have a buy recommendation. On the other hand, if it is underperforming or not doing very well compared to other stocks in the industry group than it will probably have a sell, hold or an underperform evaluation.

What you should know

Those are the two ways that analysts look at stocks. It is either absolute or relative to the market. You shouldn’t just pay attention to the buy, hold, or sell recommendations when looking at these reports. You really want to look at things a little deeper by checking to see how often the reports are changed and earnings guidance.

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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