Alternately, brokerage firms may issue an Overweight, Equal Weight, or Underweight rating. These are relatively new ratings that were developed in the aftermath of the internet bubble. The concern at that time was that analysts didn’t have a way of providing nuance to their ratings.
Therefore these new ratings were created to help analysts provide more context to their ratings. The ratings are meant to give investors a signal about price direction without being seen as offering specific buy, sell, or hold recommendations.
Here’s a brief overview of what each rating means:
Overweight Rating – This rating is given by analysts when they believe a company is expected to deliver financial results that are better than others in it sector. One distinction of this rating as opposed to a Buy rating is that an overweight rating may be given to stocks of companies that are not yet profitable. That way, instead of issuing a buy signal, analysts see this as more of a directional signal. Many investors, however, still perceive this rating as a buy signal.
Equal Weight Rating - This suggests that a stock will deliver financial performance that is roughly in line with the sector average.
Underweight Rating - This suggests that a stock is not performing as well as others in its sector. This does not mean that a company has poor financials. But it means that the stock may not perform as well as others in its sector. This is where there is confusion about underweight ratings comes in. While analysts don’t interpret it as a sell rating, it could appear that way to investors.