Wall Street Analysts Rate Stocks With a Variety of Labels. Here’s How to Read Them.
Sep 2, 2022
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: MMM). 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.”