Back to website
Seasonality Trading Strategies Unusual Options Activity Trading Strategies
5 mins read

Analyst Estimate and Rating Trading Strategies

Investors and traders often rely on a variety of sources to make informed decisions about their strategies. One such source is the analyst estimates and ratings that are publicly available for many companies. Analyst estimates and ratings can provide valuable insights into a company’s financial health, growth potential, and overall outlook, among other factors. By incorporating this information into their strategies, investors and traders can potentially improve their chances of success.

In this article, we will explore the ways in which analysts’ estimates and ratings can be used to inform trading decisions and provide some tips for incorporating this information into your own trading strategy.

What Are Analyst Estimates and Ratings?

Analyst estimates and ratings are the opinions and predictions made by financial analysts who cover a particular company or security. These analysts typically work for investment banks, brokerage firms, or independent research firms and use a variety of sources to gather information about the company they cover.

One of the primary types of analyst estimates is earnings per share (EPS) estimates. EPS estimates provide a projection of how much money a company is expected to earn per share of stock over a specific period, typically a quarter or a year. These estimates are based on a variety of factors, including the company’s financial statements, industry trends, and economic conditions. Analysts may also provide revenue estimates, which predict the amount of money a company is expected to generate over a specific period.

Another type of analyst estimate is the price target. Price targets represent the expected price of a security over a specific period, usually 12 months. These targets are based on the analyst’s analysis of the company’s financial health, growth prospects, and market conditions.

Analysts also provide ratings on stocks they cover, which range from “buy” to “sell” with variations in between. These ratings are based on the analyst’s opinion of the company’s current and future prospects and are typically accompanied by an explanation of the analyst’s reasoning.

Analyst Estimate and Rating Trading Strategies

Here are some key factors to consider when incorporating analyst estimates and ratings into your trading strategy:

  1. The analyst’s historical accuracy: Consider the analyst’s historical accuracy in predicting the performance of the stock. Look for analysts with a track record of accurate predictions and take their recommendations more seriously.
  2. The analyst’s historical inaccuracy: Alternatively, there are some analysts with a terrible track record. Some traders consider it a safe bet to bet against them and do the opposite of whatever they recommend. For example, Citi is almost always wrong about Tesla. Also, Jim Cramer of CNBC notoriously has a touch of death as things tend to do the opposite of what he predicts. There is even an ETF called the Inverse Cramer that has shown great success.
  3. The analyst’s bias: Consider any potential bias that the analyst may have. For example, the analyst may be employed by a brokerage firm that has a vested interest in promoting a particular stock. Look for independent analysts who have no financial incentive to skew their analysis.
  4. The company’s financials: Review the company’s financial statements to understand its current financial health and performance. This will help you evaluate the accuracy of the analyst’s estimates and determine whether the stock is undervalued or overvalued.
  5. The industry trends: Consider the broader industry trends and how they may impact the company’s performance. This will help you determine whether the company is likely to outperform or underperform its peers.
  6. The consensus estimate: Be aware of the consensus estimate of multiple analysts covering the same stock. This may give you a more accurate picture of what the market is expecting and it may help you identify any mispricings. However, many traders are skeptical of the consensus estimate due to the belief that whenever Wall Street is pushing a stock, they may be trying to dump their own shares on retail traders before it collapses. For this reason, take consensus estimates with a grain of salt.
  7. The time horizon: Consider the time horizon of the estimate or rating. Short-term estimates may be more accurate than longer-term ones, but it’s important to also consider the company’s long-term prospects.
  8. Your risk tolerance: Consider your risk tolerance when using analyst estimates and ratings to make trading decisions. It’s important to only invest what you’re comfortable with and to be aware of the risks associated with trading in the stock market.
  9. Your investment goals: Consider your investment goals and how incorporating analyst estimates and ratings fits into your overall trading strategy. Be clear on what you hope to achieve and how incorporating analyst estimates and ratings may help you meet your objectives.

By considering these factors when incorporating analyst estimates and ratings into your trading strategy, you’ll be able to make more informed decisions and increase your chances of success.

Pros and Cons of Analyst Estimates and Ratings

Using analyst estimates and ratings in a trading strategy can have several advantages and disadvantages. Here are some of the key pros and cons:

Pros:

  1. Access to expert analysis: Analysts who cover a particular security typically have access to a wealth of information and expertise that can be difficult for individual traders to obtain. By considering analyst estimates and ratings, traders can gain insights into a company’s financial health, growth prospects, and potential risks.
  2. Objective information: Analysts are expected to provide unbiased analysis and ratings, which can help traders make informed decisions based on objective information rather than emotions or hunches.
  3. Consensus estimates: Analyst estimates and ratings can provide a consensus view of the market’s expectations for a particular security. This can be helpful in identifying where a stock may be undervalued or overvalued relative to the market’s expectations.

Cons:

  1. Inaccurate predictions: Analyst estimates and ratings are not always accurate and can be subject to revision. Traders who rely too heavily on analyst opinions may make decisions based on outdated or inaccurate information.
  2. Conflicts of interest: Analysts may be biased in their analysis due to conflicts of interest, such as investment banking relationships or personal investments in the companies they cover.
  3. Limited scope: Analyst coverage may be limited to certain industries or sectors, which can restrict the range of securities that traders can consider for their portfolio.
  4. Over-reliance: Over-reliance on analyst estimates and ratings can lead to herd behavior, where traders make decisions based solely on the opinions of others rather than their own analysis and research.

Overall, incorporating analyst estimates and ratings into a trading strategy can provide valuable information, but traders should be cautious about relying too heavily on this information and should also consider other factors such as market trends and company news.

Example scanners and strategies that use Analyst Estimate and Rating

Analyst estimates and ratings can be used in both Scanning the market and Testing Strategies. To see how exactly it can be used in these ways, we provide the following samples. The scanner searches the market for stocks using this indicator, and the strategy tests buying and selling rules built around this indicator.

"Analyst Upgrade & Price Goes Up" scanner by TrendSpider
charts.trendspider.com
“Analyst Upgrade & Price Goes Up” scanner by TrendSpider
"Analyst Estimate - Buy Rating Today" strategy by TrendSpider
charts.trendspider.com
“Analyst Estimate – Buy Rating Today” strategy by TrendSpider

The Bottom Line

Incorporating analyst estimates and ratings into a trading strategy can provide valuable information for making informed decisions. However, it is important to note that analyst opinions can vary, and their predictions may not always be accurate.

By using analyst estimates and ratings in combination with other sources of information, traders can increase their chances of making profitable trades while minimizing risk. Ultimately, a well-rounded trading strategy that incorporates multiple sources of information can lead to greater success in the markets.

Related:

  • Technical Strategies

    Technical Analysis Strategies 

    Technical analysis is a popular approach used by traders and investors to analyze and make decisions based on price charts and other technical indicators. In contrast to fundamental analysis, which focuses on the underlying financial and economic factors that affect the value of an asset, technical analysis seeks to identify patterns and trends in price …
    Technical Analysis Strategies
  • Technical Strategies

    Moving Average Crossover Strategies 

    When it comes to trading in financial markets, there are a variety of strategies that traders can use to make informed decisions about when to buy or sell assets. One popular approach is the use of moving average crossover strategies, which involves analyzing the intersection of two moving averages to identify potential trading opportunities. In …
    Moving Average Crossover Strategies
Seasonality Trading Strategies Unusual Options Activity Trading Strategies