Business, Legal & Accounting Glossary
A quantitative measure of the average analyst recommendation for a given stock. Each individual analyst recommendation (buy, hold, sell, etc.) for a given stock is translated into a number, and these numbers are averaged.
The consensus recommendation is an average of analyst ratings on a stock. Suppose five security analysts follow Acme stock; two say “buy”, one says “hold”; two say “sell”. To compute a consensus recommendation, each rating is assigned a value, e.g., a buy is a 5; a hold, 3; a sell, 1. The consensus recommendation is the average rating, weighted by a number of analysts: [(2 X 5)+(1 X 3)+(2 X1)]/5. Thus the consensus recommendation is a 3, or hold. Like any weighted average, the consensus recommendation has its pluses and minuses. The consensus recommendation does give you a quick idea of what Wall Street pros think of the stock. But the consensus recommendation can also conceal wide differences of opinion among analysts: in the example, note that the consensus recommendation (hold) was the rating of the fewest analysts. In addition, the methodology of a consensus recommendation is open to scrutiny. For example, it’s questionable whether the ratings of the best analysts should receive the same weight as those of analysts held in less esteem.
A consensus recommendation for a certain stock is derived from the ratings of a number of analysts that follow the stock. The recommendation is either the average or median of the individual recommendations. Calculating the consensus is a multi-step process that involves categorising the terms analysts use to recommend buying, selling, or holding in three or five categories, assigning a scale, and computing the result either by averaging the numbers for the mean or by identifying the median, which is the point at which half the views are higher and half are lower. A consensus recommendation captures current sentiment toward a stock, and thus serves as a baseline against which you may measure a single analyst’s opinion to determine how widely held it is. However, as with any statistical mean or median, a consensus proposal has the potential to exaggerate extremes on either end of the spectrum. Additionally, if the report accompanying the consensus view does not highlight substantial divergences in the opinions of the individual analysts included, you will be unable to determine the consensus view’s position on the stock. Additionally, you should be aware that the consensus recommendation for any one stock may vary between research firms. This is because the mathematical method used to weight the individual suggestions will vary depending on the number of levels of differentiation used by the research business and how the language used by analysts to communicate their thoughts are interpreted.
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This glossary post was last updated: 5th April, 2022 | 0 Views.