Buy? Hold? Sure? - stock rating terms explained - Questions and Answers - Brief Article - Column

Kiplinger's Personal Finance Magazine, May, 2000 by Kimberly Lankford

Q & A | Stock RATINGS are very clear, unless they aren't.

Please explain stock-rating terms, such as market perform, strong buy, attractive, outperform, neutral and accumulate. It seems as if each brokerage has its own terms. -- RICHARD FONTENOT, Salisbury, N.C.

You're right. Each firm speaks its own language. They may say strong buy, buy, attractive or outperform when they think a stock will do well, neutral, hold, market perform or hold when they don't, and hold (again), underperform or reduce when they really mean sell. Firms usually rank stocks based on their expected total return over the next 12 months (see www.kiplinger.com/ magazine for examples from four brokerages).

A buy rating could be the top grade at one firm, but below strong buy at another. Attractive and accumulate usually mean one step below buy. Briefing.com, which reports on upgrades and downgrades, lists each firm's categories in its "Equity Ratings Systems" section.

Zacks Investment Research (www.zacks.com) compiles analysts' buy and sell recommendations and then translates the results into a standardized scale, giving a firm's highest-rated buy a 1.0 value, the weakest sell a 5.0 and in-between numbers, carried to tenths, for any other categories.

Don't expect to find many sell recommendations. "In the past six months, I can think of only a couple of instances," says Greg Jones, chief economist for Briefing.com. Some firms don't even use a category lower than hold.

Jones recommends that rather than just looking at the ratings, you also try to figure out the rationale behind them. "You should be concerned when there's a downgrade, even if it's from a `strong buy' to a `buy,'" he says.