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Compares the current Consensus Analyst Recommendation to that of four weeks ago. On the scale of 1 to 5: 1 best, and 5 worst.
Fails if: The analyst recommendation deteriorated, and the net change of the recommendation value is greater than zero.
Typically, analysts advise institutional investors who have large amounts of money at their disposal and trade large quantities of shares. Combined with the publicity surrounding rating downgrades and the resulting selling done by other investors, recent rating downgrades are likely to influence share price not just immediately after issuance of the downgrade but possibly for weeks and months.
Rating downgrades should not always be accepted as an automatic sell signal. Analysts are only human and are not always correct in their judgments. Any analysis should consider the wide variety in investment styles. For example, factors that lead to a bearish rating based on one style might be neutral or even positive for those who pursue other approaches.
Analyst recommendations are generally based on a style that is closely tied to short-term earnings performance and prospects. Companies whose short-term results are perceived to be superior tend to garner bullish ratings. A rating downgrade often means the near-term earnings situation has dimmed.
Analysts occasionally depart from earnings-based advice and base rating changes on valuation; this tends to occur only in response to extremes in overvaluation or undervaluation. At other times, analyst ratings will be based on other considerations such as asset valuations. Nonetheless, earnings-based considerations are so dominant it is often reasonable to start your analysis with an assumption that this is what sparked the rating change until subsequent investigation shows you that something else is at work.
When reviewing this test, check if the rating change occurred close in time to an earnings release or the reporting of new earnings guidance from the company.
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