Although an overweight rating technically means the stock should have a higher weighting in the underlying benchmark, it usually is interpreted by market participants that the company is doing well, and its stock price should move higher. In other words, investors view an overweight rating as an indicator that the stock price should perform better than the performance of the overall index that's being used as the baseline for comparison.
If an analyst believes that a stock price should appreciate, the analyst will likely indicate the time frame and an expected price target within that time frame. A criticism of overweight ratings is that equity analysts do not provide specific guidance as to how much of the stock should be purchased by investors. One investor might interpret an overweight rating as an indicator to buy 1, shares of the stock while another investor might interpret the rating differently and buy only 10 shares of the stock.
Also, the current position size of the stock that comprises an investor's portfolio plays a critical role in determining how many additional shares to purchase based on the new rating. If a stock currently has a large position within a portfolio and an investor buys more shares based on the overweight rating, the portfolio might not be diversified.
In other words, the portfolio might be out of balance whereby too much of the investor's investment capital is tied up in one company. If the analyst turns out to be wrong, and the stock price goes down, the investor stands to lose more money because there's an overexposure to one stock.
The overweight rating provides a little guidance as to how specifically investors should go about purchasing the shares as it relates to their investment portfolio.
Perhaps a portfolio that is heavy with technology stocks shouldn't purchase an additional technology stock based on an overweight rating since the portfolio could become out of balance. It's important to consider that an overweight rating by some equity analysts might be a short-term trade.
Investors should investigate how an analyst conducts their recommendations, determine what they're using as a benchmark, and whether they're long-term or short-term investors.
The investment time horizon, including the investor's age, will likely determine how long a stock might be held in a portfolio. For example, a retiree might hold a stock for only a few months or years because it may need to be converted to cash at some point. A millennial, on the other hand, will have a much longer outlook or time horizon for holding that stock. The analyst's rating needs to be taken into context with the investor's time horizon, risk tolerance, and whether the money will be needed at some point in the future.
Analysts may give a stock an overweight rating due to positive earnings and raised guidance. For example, assume company DEF, a technology company, releases its quarterly earnings results and beats its earnings per share and revenue estimates. Trading Basic Education. Mutual Fund Essentials. Hedge Funds Investing. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile.
It needs to be remembered that just because Fund A is underweight on Maruti it does not mean that the fund is negative on Maruti. Similarly, just because Fund B is overweight on Maruti it is not necessary that they are positive on Maruti. Here are the reasons why funds could be overweight or underweight without indicating any stock preference.. Fund A, in the above case, may be already having a substantial exposure to the auto sector in India and hence they may have gone underweight on Maruti to just maintain their overall balance.
In the case of Fund B, the research team may have a view that interest rates in India may be headed downwards and hence they may be overweight on Maruti purely to play on the interest rate sensitive aspect of the stock. Normally, passive funds like index funds and ETFs tend to tail these allocations. But then the reallocations are done on a periodic basis. During the period, any shifts in portfolio or sharp movement in prices may make the fund overweight or underweight on particular stocks.
Just as funds can be overweight or underweight on specific stock allocations they can also be overweight or underweight based on sectoral allocation. To understand this point let us focus on the MSCI sectoral allocation in this case..
Normally passive funds like ETFs and index funds broadly try to mirror this mix as that is the only way they can reduce their tracking error and reflect the MSCI India Index returns as closely as possible.
But for active fund managers this overweight and underweight on sectors boils down to the search for alpha. The reason fund managers go underweight on sectors is the search for excess returns or alpha. Fund managers are paid to beat the index because if investors want to just earn index returns then they would be better off putting money in index funds, which entail much lower costs.
Stock analysts are employed by investment firms to perform research and issue recommendations. This often comes in the form of a rating.
Not every firm uses the same terms. Some use systems with five tiers instead of three. There are no rules dictating how companies issue ratings, so it helps to become familiar with each company's system.
But it can be even more confusing. In most cases, your portfolio should be made up of a diverse mix of stocks and other investments. You should try to avoid being too heavily invested in any one thing. When your portfolio is unbalanced, it may mean that you are too heavily invested in one thing. So, what does this have to do with analyst ratings? So, for instance, in May , Apple had a weighting of 5. But none of this is very useful for the average person.
Ratings are simply one piece that goes along with past price performance, earnings reports, profit margin, and other information. No one should ever buy or sell a stock based on what one single person thinks.
0コメント