How Are Stocks Rated?
- There are numerous methods for rating stocks, many just simple financial metric comparisons or simple models, but some are much more complex models with many dozens of variables and undertaken using sophisticated, custom software. Quite a few stock rating services are free (StockScouter, MyStock Rater), but as a general rule you get what you pay for, as their track records are spotty. The major stock rating services like Morningstar and Value Line, however, charge fees for access to most of their research and ratings on stocks.
- While Morningstar keeps the details of its stock analysis methods confidential, it does acknowledge that it is a "process-based" system with numerous variables but final decisions on rankings are made based on the judgment of a human analyst. Morningstar rankings put the greatest number of companies in the Hold category, the second greatest number in the Outperform and Buy categories, and the least number in the Underperform and Sell categories.
- Value Line also does not release the full details of its stock analysis methods, but it does specify that it is a rules-based, completely machine-generated ranking, with no human judgment involved. The formula underlying the stock analysis method produces a classic bell curve, with by far the largest number of companies rated as Hold, relatively fewer as Outperform and Underperform, and fewest of all as Buy or Sell.
- There are also a number of smaller, boutique stock analyst firms that specialize in using technical analysis to rate stocks, usually for a fee. These firms track individual stocks and stock indices and offer buy and sell advice based on whether the stock is oversold or overbought, or trading extremely high volume and so forth.