Wall Street analyst firms regularly publish target prices and “buy, sell or hold” recommendations for stocks of various publicly-traded companies. In the analyst firm’s opinion, “this is a good stock to buy for your portfolio” or “now is a good time to sell.” Analyst firms often also include target prices, which are predictions about future stock prices. But how reliable are these ratings and target prices?
Not all financial analyst firms are the same: some cover many sectors of the economy and many industries, while others focus only on certain sectors or specific companies. Sources of information and methodologies differ, as do the ratings and price forecasts published by analyst firms.
In these circumstances, how should investors make sense of the different price forecasts, especially when analyst firms disagree on the future prospects of the same stock? How should investors evaluate analysts’ assessments, and how can they gain more confidence in the recommendations they follow? To make more informed choices, investors need a scorecard designed to objectively evaluate analyst recommendations.
In the Top Analysts section, Yahoo Finance “rates the raters,” providing a transparent, objective scorecard to help investors assess the accuracy of Wall Street’s price predictions by comparing analyst firms’ forecasts with actual stock performance.
Step 1: Understand your data
The Top Analysts section includes data from multiple sources, so it’s important to understand what is being represented.
Data from analyst firms: Each row of data in this section contains the name of the analyst firm that first published a rating and target price for a particular stock. The name of the analyst firm appears in the Analyst column, and the company’s latest Buy, Sell, or Hold rating appears in the Latest Rating column. Green labels represent a Buy recommendation from the analyst firm, red labels represent a Sell recommendation, and grey labels represent a Hold recommendation. The date the analyst firm’s latest target price and guidance was published appears in the Target Price and Date columns. Yahoo Finance receives its rating data from Benzinga.
Data from Yahoo Finance: Additionally, the Top Analysts section also includes columns for Direction Score, Price Score, and Overall Score, which Yahoo Finance creates to “rate the raters.” To create these scores for each analyst firm, Yahoo Finance takes a few extra steps.
Step 2: Prepare your data
The next step for Yahoo Finance is to compile historical valuation and stock price data to use in scoring.
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Data for Scoring: The data used by Yahoo Finance comes from multiple sources, so it’s important to understand those sources as well. As mentioned above, analysts’ original ratings and price targets published by analyst firms are provided by Benzinga. Current and historical stock price data is provided by ICE Data Services and Commodity Systems. Company action data, such as stock splits, is provided by LSEG Data and Analytics. To standardize the analysis, daily market closes are used for all scoring. While historical stock price data is adjusted for any relevant company actions, analyst price targets are only adjusted for stock splits. (See Q&A for more details.)
Time horizon: Yahoo Finance uses a one-year horizon for scoring. The day an analyst’s rating is published is day 0, and the closing price for a given stock on that day is the benchmark price (the price used to score the accuracy of an analyst firm’s one-year forecasts). Scores are calculated and aggregated for each business day during the year. The aggregated daily scores are weighted based on a “decay curve,” where older data points are weighted less than newer data points. The same decay curve is used to evaluate all analyst firm ratings and price targets.
Step 3: Score the data:
The final step is to score each analyst firm’s forecasts and publish the results. Here’s what the scores mean in the Top Analysts section:
Directional Score: The directional score indicates whether the stock price is moving in line with the analyst firm’s forecast of buy, sell, or hold ratings. In the case of a buy rating, the stock price is expected to rise compared to the benchmark price from day 0. In the case of a sell recommendation, the stock price is expected to fall and in the case of a hold rating, the price is expected to remain flat. A score of 1 is given on a daily basis if the actual price movement is in line with the analyst’s predictions and a score of 0 is given on a daily basis if the price movement is not in line.
Example: Say a stock’s opening price was $10 (Day 0) and it has an analyst rating of “Buy”. If the closing price the next business day is $11 (Day 1), the Direction Score for that day will be 1 because the analyst rated the stock as “Buy” and the actual price movement was above the benchmark price, matching their forecast. On the other hand, if the closing price was $9 (Day 1), the Direction Score for that day will be 0 because the price movement was below the benchmark price, matching their forecast.
Price Target Score: The price target score calculates the historical stock price movement compared to the assumption that, on average, the starting benchmark price (day 0) moves in a straight line towards the analyst firm’s forecast price target within one year (day 365).
Example: If the benchmark price was $0.01 (day 0) and the one-year target price was $365.01 (day 365), the “linear assumption” would dictate that the price would rise by $1 each day for 365 days to reach the target price of $365.01 in one year. If the close on the next business day was greater than or equal to $1 (day 1), the stock would be on pace to reach the one-year target price and would receive a target price score of 1 for that day. On day 2, the close would need to be greater than or equal to $2 to stay on pace to reach the one-year target price. If the price moves as predicted on day 2, the score would again be 1. If instead the price movement did not move as predicted and was less than $2, the target price score for that day would be 0.
Overall Score: The overall score combines the directional score (weighted 50%), the price target score (weighted 20%), and a third component called market movement (weighted 30%). Market movement calculates the annualized absolute return compared to the benchmark price on each day. For example, if a stock is priced at $100 on day 0 and $90 on day 1, the regression accuracy is |90 – 100| / 100. This value represents whether the valuation prediction was made at a meaningful time.
In summary, the Top Analysts section contains the original ratings and price target data from Wall Street analyst firms, along with scores added by Yahoo Finance on the historical accuracy of those ratings and price forecasts, designed to help investors make more informed choices by providing a convenient scorecard to objectively evaluate analyst firms’ recommendations. The scoring methodology developed by Yahoo Finance emphasizes the importance of correctly grasping the predicted buy, sell, or hold direction of a stock’s price moment, while also providing investors with additional information on the accuracy of each analyst firm’s price target.
feedback
While we strive for accuracy, consistency, and objectivity in our assessments, we recognize that methodological choices may lead to differences in interpretation and results. We are committed to continually evaluating and refining our methodologies to increase the quality and relevance of our analysis, and welcome thoughtful feedback that helps us improve our features for the benefit of our users.
FAQ
Q: Are analyst firms allowed to change their forecasts?
Yes. Analyst firms update their ratings frequently. When either the directional recommendation (buy, sell, hold) or the price target changes, the rating of the old forecast stops and the rating of the new forecast begins. As a result, scores are impacted based on the time elapsed and the time remaining in the one-year period. For example, if an analyst firm initially rates a stock as a buy, updates its rating to a sell three months later, and then maintains the sell rating until the end of the year, the initial buy rating (and resulting score) will have less impact than a sell rating (and resulting score) when calculating the analyst firm’s overall score. This approach ensures that ratings and scoring reflect all forecasts made over time.
Q: Are overshooting and undershooting price targets valued the same?
Yes. The scoring methodology used focuses on assessing the absolute accuracy of the forecast without taking into account tradable actions and potential profits, as investors have different strategies and trade in different ways. The score is based on the absolute difference between the price target and the actual market price, regardless of the direction of the difference (up or down).
Q: How do you handle unknown analyst names or publication dates (e.g. NaN)?
Ratings with unknown analyst name or publication date are discarded, as both pieces of information are necessary to evaluate the rating agency’s forecast. If a rating does not have a buy/hold/sell recommendation but has a price target, the buy/hold/sell recommendation is inferred from the price target. If a rating does not have a price target, the accuracy of the price target is replaced by the lowest score currently possible. This approach will continue to be evaluated and an update will be provided if there are any changes to this methodology.
Q. Why do analyst price targets only adjust for stock splits?
Our research shows that the impact of corporate actions other than stock splits typically falls within the noise range (5%) for the underlying stock valuations and price targets. For example, analysts incorporate their own adjustments for dividend payments into price targets, so no further adjustments are necessary. We continually monitor the impact of corporate actions on our scoring methodology and will incorporate further adjustments as necessary in the future to maintain comparability, consistency, and objectivity.
Q. Where can I find out about Yahoo Finance’s data providers?
For more information on Yahoo Finance’s exchanges and data providers, check out this help article.