Wall Street’s analyst firms regularly publish price targets and recommendations to “buy, sell, or hold” the stocks of various public companies. In the view of the analyst firm,“This is a good stock to buy for your portfolio.” Or, “Now is a good time to sell.” Analyst firms often include price targets, too — predictions about the future stock price. But, how reliable are these ratings and price targets?
No two financial analyst firms are the same. Some cover many sectors of the economy, or many industries. Others focus on a specific sector or only select companies. Sources and methods differ, and so do the ratings and price predictions that analyst firms publish.
Under these circumstances, how does an investor make sense of the wide array of price expectations, especially when analyst firms disagree about the future outlook of the same stock? How should investors evaluate analyst ratings, and how can investors feel more confident about the recommendations they choose to follow? To make more informed choices, investors need a scorecard designed to evaluate analyst recommendations objectively.
In the Top Analysts section, Yahoo Finance “rates the raters” and provides a transparent and objective scorecard to help investors evaluate the accuracy of Wall Street’s price predictions by comparing those analyst firm predictions to actual stock performance.
Step 1: Understanding the Data
The Top Analysts section includes data from multiple sources, so it is important to understand what is represented.
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Data from Analyst Firms: Each row of data in this section contains the name of an analyst firm that originally published a rating and price target for a particular stock. The name of the analyst firm appears in the Analyst column, and the firm’s latest Buy, Sell, or Hold rating is shown in the Latest Rating column — a green label indicates a Buy recommendation, a red label indicates a Sell recommendation, and a gray label represents a Hold recommendation from the analyst firm. The analyst firm’s latest price target and the date when the guidance was published appear in the Price Target and Date columns. Yahoo Finance receives the ratings data from Benzinga.
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Data from Yahoo Finance: Additionally, the Top Analysts section also includes columns for Direction Score, Price Score, and Overall Score which are produced by Yahoo Finance to “rate the raters.” To produce these scores for each analyst firm, Yahoo Finance follows some additional steps.
Step 2: Preparing the Data
The next step that Yahoo Finance follows is to aggregate historical ratings and stock price data that will be used for scoring.
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Data for Scoring: The data Yahoo Finance uses come from multiple sources, so it is important to understand those sources as well. As mentioned, the original analyst 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. Corporate actions data such as stock splits is provided by LSEG Data and Analytics. To standardize analysis, daily market close prices are used for all scoring. Historical stock price data is adjusted for all relevant corporate actions, however, analyst price targets are only adjusted for stock splits. (See Q&A for more detail.)
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Time Horizon: For scoring Yahoo Finance uses a one-year horizon. The date the analyst 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 the analyst firm’s predictions over the one-year horizon. Scores are calculated each market day for one year and aggregated. The aggregated daily scores are then weighted on a “decay curve” giving older data points less weight than newer data points. The same decay curve is used to evaluate all analyst firm ratings and price targets.
Step 3: Scoring the Data:
The final step is to score each analyst firm’s predictions and present the results. Here’s what the scores in the Top Analysts section represent:
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Direction Score: The Direction Score indicates whether the stock price is moving in agreement with the Buy, Sell, or Hold rating predicted by the analyst firm. For Buy ratings, the stock price is expected to increase as compared to the benchmark price from Day 0. For Sell recommendations, the stock price is expected to decrease, and for Hold ratings the price is expected to remain flat. A score of 1 is given each day when the actual price change agrees with the analyst’s prediction, and a score of 0 is given each day when price changes do not agree.
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Example: Say the starting price of a stock was $10 (Day 0) and the analyst rating was “Buy.” If the next market day the closing price was $11 (Day 1), then the Direction Score for that day would be 1 — the analyst rated the stock a “Buy” and the actual price change was above the benchmark price, agreeing with the prediction. If instead the closing price was $9 (Day 1), then the Direction Score that day would be 0 because the price change was below the benchmark price and not in agreement with the prediction.
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Price Target Score: The Price Target Score computes historical stock price change compared to an assumption that on average, the starting benchmark price (Day 0) must move linearly towards the analyst firm’s predicted price target within one year (Day 365).
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Example: If the benchmark price was $0.01 (Day 0) and the one year price target was $365.01 (Day 365), then the “linear assumption” is that the price will increase $1 each day for 365 days to reach the price target of $365.01 in one year. If the next market day the closing price was equal to or greater than $1 (Day 1), then the Price Target Score would be 1 that day because the actual stock price was on pace to reach the annual price target. On Day 2 the closing price would need to be equal to or greater than $2 to remain on pace to reach the annual price target. If the price kept pace on Day 2, then a score of 1 would be given again. If instead the price movement did not keep pace with the prediction and was less than $2, then the Price Target Score for that day would be 0.
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Overall Score: The Overall Score is a combination of the Direction Score (weighted 50%), the Price Target Score (weighted 20%), and a third factor described as Market Movement (weighted 30%). Market Movement computes the annualized absolute return compared to the benchmark price each day. For example, if a stock is at $100 on Day 0 and $90 on Day 1, the regression accuracy would be |90 – 100| / 100 — this value represents whether the rating’s prediction was made at a meaningful time.
In summary, the Top Analysts section — which includes ratings and price targets data originally published by Wall Street’s analyst firms, plus scores added by Yahoo Finance about the historical accuracy of those ratings and price predictions — is designed to help investors make more informed choices by providing a useful scorecard to objectively evaluate analyst firm recommendations. The scoring method developed by Yahoo Finance emphasizes the importance of getting the predicted Buy, Sell, or Hold direction of stock price moment correct, while also providing investors with additional information about the accuracy of each analyst firm’s price targets.
Feedback
While we strive for accuracy, consistency, and objectivity in our evaluations, we recognize the potential for differences in interpretation and outcomes based on methodological choices. We are committed to continuously evaluating and refining our methods to enhance the quality and relevance of our analyses, and we welcome thoughtful feedback that can help improve features for the benefit of our users.
FAQ
Q: Are analyst firms allowed to change their predictions?
Yes. Analyst firms often update their ratings. If either the directional recommendation (Buy, Sell, Hold) or price target changes, the evaluation of the old prediction stops and evaluation of the new prediction begins. As a result, scores are influenced based on the amount of time elapsed and remaining on the one-year time horizon. For instance, if an analyst firm initially rates a stock as Buy, updates the rating to Sell after three months, and then maintains the Sell rating until the end of the year, the initial Buy rating (and resulting scores) have less impact than the Sell rating (and resulting scores) when calculating the analyst firm’s overall score. This approach ensures that the assessment and scoring reflects all predictions made over time.
Q: Is overshooting and undershooting a price target scored in the same way?
Yes. The scoring approach used focuses on evaluating the absolute accuracy of predictions, without considering tradable actions or potential returns because investors have different strategies and trade differently. Scores are based on the absolute difference between the price target and the actual market price regardless of the direction of the difference, over or under.
Q: How are unknown analyst names or announcement dates (i.e. NaNs) handled?
Ratings with an unknown analyst name or announcement date are discarded, as both pieces of information are necessary to evaluate a rater’s predictions. If a rating has no Buy/Hold/Sell recommendation but a price target, then the Buy/Hold/Sell recommendation is imputed from the price target. If a rating has no price target, the price target accuracy is replaced by the lowest score possible currently. This approach will continue to be evaluated, and updates will be provided if changes are made to this methodology.
Q. Why are analyst price targets only adjusted for stock splits?
Based on our review, the effect of most corporate actions (other than stock splits) is typically within the range of noise (5%) for the stock ratings and price targets evaluated. For example, analysts incorporate their own adjustment for dividend payouts into their price target, making it unnecessary to make further adjustments. We continually monitor the impact of corporate actions on our scoring methodology and will incorporate more adjustments in the future as needed to ensure comparability, consistency and objectivity is maintained.
Q. Where can I learn about data providers for Yahoo Finance?
Visit this Help article for more information about exchanges and data providers on Yahoo Finance.