How to Interpret Equity Research Reports

“Buy”, “Sell” and “Hold” Ratings

Equity research reports are one of several types of key documents analysts have to gather before diving into a

full-scale financial modeling project. That’s because research reports contain estimates used widely

by investment bankers to help drive the assumptions underpinning 3-statement models and other models

commonly built on the sell side.

On the buy side, equity research is also widely used. Like investment bankers, buy-side analysts find the

insights in sell-side equity research reports helpful. However, equity research is used to help the buy side

professional understand the “street consensus,” which is important for determining the extent to which

companies have an unrealized value that may justify an investment.

The three main types of ratings ascribed by equity research analysts are the following:

1. “Buy” Rating → If an equity research analyst marks a stock as a “Buy”, the rating is a formal

recommendation that upon analyzing the stock and the factors that drive price movements, the analyst

has determined the stock is a worthwhile investment. The markets tend to interpret the rating as a “Strong

Buy”, especially if the report’s findings resonate with investors.

2. “Sell” Rating → In order to preserve their existing relationships with the management teams of publicly

traded companies, equity analysts must strike the right balance between releasing objective analysis

reports (and recommendations) and maintaining an open dialogue with the company’s management team.

That said, a “Sell” rating is rather uncommon in occurrence because the market is aware of the relationship

dynamics (and will interpret it as a “Strong Sell”). Otherwise, the analyst’s rating can be framed to not

cause a steep decline in the market share price of the underlying company, while still releasing their

findings to the public.