Consensus recommendations are an average analyst rating on a stock, indicating whether to hold, buy, or sell. Each analyst’s recommendation is assigned a numerical value, which is added and divided by the number of recommendations to determine the consensus recommendation. However, it should be considered as an indicator, not the only piece of information for investment decisions.
Consensus recommendations are essentially a collection of analyst ratings on a given stock that have been used to produce an average analyst recommendation. By identifying the key elements of each analyst recommendation, it is possible to determine what the overall recommendation is for dealing with the stock option. A consensus recommendation may indicate action to hold current shares, buy additional shares, or sell all or part of the currently available shares.
To achieve a consensus recommendation, each stock analyst’s findings will be assigned a numerical value. The type of recommended action inherent to individual recommendations carries a different numerical value for each recommended action. For example, a recommendation to buy would often be identified as a 5, while a recommendation to hold current stocks would merit a value of 3. After all recommendations are identified, the numerical values are added and the sum is divided by the number of analyst recommendations The resulting figure will represent the consensus recommendation.
As an example, suppose a total of six stock analyst recommendations are collected for a given stock. Three indicate buying, while one urges selling the shares, and two recommend holding the shares. Using the numerical scale mentioned above, this would generate a sum of 22, which would then be divided by the number of recommendations collected, which is six. The end result is a consensus recommendation of 3.6, which is rounded to the nearest numerical value of the quoted picks, or 3. Therefore, the consensus recommendation is to hold the stock for now.
It is important to note that while the consensus recommendation is a great way to get a big picture quickly, it does not necessarily recommend the best solution for the investor. The criteria used by each analyst may vary, resulting in different opinions based on a wide range of data. For this reason, a consensus recommendation should be considered as an indicator, but not the only piece of information that an investor should take into account when making an investment decision.
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