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?
- Absolute Value
- 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.