Investors who prefer a less-risky strategy than betting on a hot stock tip put effort into research. They examine each company’s financials, and review the challenges and opportunities facing the particular business – as well as the industry in general.
There is a seemingly endless array of analysts and market researchers willing to offer opinions on the future of specific companies, industries, and the market as a whole. It can be difficult for an average investor to sift through all of the material and pull out the most reliable – especially when data conflicts.
A deep understanding of the terms analysts use and how they make their recommendations is the best way to separate useful information from amateur opinions.
One of the most frequently misunderstood terms is “overweight”. When analysts describe stocks as overweight, it is common for investors to take that as a recommendation to buy.
However, the term overweight doesn’t always mean buy – and if it does, more information is needed before you can be sure exactly how much to invest in a given security.
This guide offers insight into when analysts use the term “overweight stock”, as well as details on additional information you should review before making a trade.
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Table of Contents
What Does an Overweight Stock Rating Mean?
At its most basic, an overweight rating means that the analyst believes a stock will increase in value over the coming months.
It generally correlates to a “buy” rating, as the analyst is saying it is possible share prices will outperform industry peers and/or the market as a whole.
Analysts using the term overweight are typically looking at a six – twelve-month timeframe, though in certain cases the timeframe may be shorter or longer.
They may rate a given security as overweight for any number of reasons. Some of the data they look at include the following:
- Positive news from the company or industry
- Strong earnings reports
- Outperforming earnings per share and revenues estimates
- How the company’s financial statements compare to competitors
It is important to note that the term “overweight” used in reference to a stock rating is an entirely different concept from the term “overweight” used in reference to a portfolio.
A portfolio that is overweight in a certain type of asset may be relying too heavily on that asset. Ideally, portfolios contain a balanced mix of assets that reflect financial goals and the investor’s tolerance for risk.
If you invest in an index fund, you might hear that a company is “overweight” in that fund. That means the fund has more of a particular company’s shares than does the underlying index. For example, as of September 30, 2018, Apple made up 4.21% of the S&P 500 index.
If any of the index fund managers elected to increase Apple holdings above 4.21 percent, the fund could be described as “overweight” in Apple. Again, this use of the term overweight is not related to overweight in the context of a stock rating.
Why Overweight Stock Ratings Can Be Confusing
One of the issues individual investors face when choosing stocks for their portfolios is the varied terms analysts use to make recommendations. Analysts are employed by private investment firms, and there is no requirement that they use consistent language.
You might hear a stock rated as “buy“, “overweight“, “outperform“, “accumulate“, or “add“. All of these are positive ratings. Exactly how positive depends on context, as well as whether the analyst is working with a three-tier or five-tier rating system.
Adding to the complexity of defining “overweight” is the fact that analysts may also use this term to describe entire industries. For example, an analyst who believes the technology sector is poised for growth in the next six – twelve months might describe the sector as overweight.
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Does an Overweight Stock Rating Mean Buy or Sell?
The bottom line is that an overweight rating is a positive sign that a given security could be a good investment.
However, a single analyst’s positive rating – and even multiple analysts’ positive ratings – aren’t enough to make a buy decision.
After all, analysts often disagree. These ratings are pieces of a larger puzzle, and you need to see the full picture before handing over your hard-earned cash.
Before investing in any business, review analyst ratings to get a sense of which types of businesses might best meet your financial goals. This is a good starting point, but remember some analysts are pursuing their own agendas – and it is unlikely that their agendas align with yours.
Next, collect additional information that offers critical insight into the companies’ prospects. Examples of useful information include the following:
- Past price performance
- Earnings reports
- Profit margins
- Amount of debt compared to assets
- Dividend history
You are looking for consistent revenue growth over time, as well as a reasonable amount of profit. You can calculate this by determining the difference between revenue and expenses, thought admittedly it gets quite a bit more complex if you want to factor in taxes, or one time charges – such as building purchases.
Overweight Stock Ratings Are Not Enough
Finally, make sure you have a high-level understanding of the business you are investing in. How does it make money now, and how does it plan to make money in the future? Do you believe this company can change and adapt with changing consumer needs?
For example, a business that has been unwilling or unable to open digital service channels and e-commerce options may be less likely to be successful in coming years.
Stocks like Netflix and Alphabet (aka Google) became extraordinarily successful because they were at the cutting-edge of new technology shifts. Is the company you are considering at the cutting-edge or a laggard?
Ready To Start Investing In Overweight Stocks?
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Top stock brokers, like TD Ameritrade’s thinkorswim platform, feature a wealth of tools and screener to help you select hidden gems that may otherwise go undiscovered.
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