Wall Street Analysts Rate Stocks With a Variety of Labels. Here’s How to Read Them.

Wall Street analysts slap Buy, Strong Buy, Sell, Underperform, Neutral or other labels on stocks

Michael Nagle/Bloomberg

Ratings can be confusing. Analysts slap Buy, Strong Buy, Sell, Underperform, Neutral or other labels on stocks, but investors should realize that, really, there’s just Buy or Don’t Buy.

Consider 3M (ticker: 3M). Its shares are down roughly 50% from their record high, hit in 2018—and it isn’t difficult to see why. 3M is supposed to earn roughly the same amount in 2023 that it did in 2018, while sales have grown at a less-than-robust 2% clip over the past decade. The company is also dealing with significant—and hard-to-quantify—legal liabilities. It’s not a stock many investors are dying to own these days.

This shows in 3M’s ratings on Wall Street. Only one analyst rates the Minnesota-based manufacturer a Buy, while seven rate it a Sell. But there’s a large cluster—13 analysts—in the middle who rate it a Hold, or hold equivalents, such as Market Perform or Neutral. Investors shouldn’t assume that those analysts actually think 3M stock is worth holding or believe it will keep up with the

S&P 500,

which is what Hold suggests. In fact, they’re just gentler Sell calls, says Jim Osman, founder of research firm The Edge Group, which avoids that rating.

“No business is really made on Sell recommendations, and analysts don’t want to look stupid either, if it goes the other way,” notes Osman. “Hold is the middle ground that really is useless for the investor, but safe for the analyst.”

Analysts’ desire for self-preservation is one motivation for these wishy-washy ratings. Research directors can recount phone calls from offended companies, demanding blood after a Sell has been slapped on their stock. It’s harder to complain about a Hold.

The idea that business issues, reputational concerns, and other non-stock considerations might influence ratings—even if subconsciously—might sound more alarming than a Hold that’s really a Don’t Hold. But nothing sinister is going on, says Osman. Most brokerage research is produced for “sophisticated investors,” meaning people who are paid to read it for a living.

And most of them don’t care about whether a stock is rated Buy or Sell, but are interested in an analyst’s industry knowledge or having a sounding board for their own ideas. “We deal with over 250 institutional clients, from small to enormous,” says Osman. “Not many of them look at valuations or ratings.”

So should we care about ratings? Yes. Academic studies have examined the impact of Wall Street research over time, and many have found that Buy-rated stocks, on average, outperform the market. It’s a sign that analysts, in aggregate, can identify the better companies among those they follow closely.

Just remember: Don’t take all the ratings literally.

Write to Al Root at allen.root@dowjones.com

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