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Consensus Recommendation

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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 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.



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