Financial analysts give their opinions of the future performance of a security. They can give performance ratings of underweight, overweight, or market perform to a security. If analysts give a stock an overweight rating, they expect the stock to outperform its industry in the market. Analysts may give a stock an overweight recommendation due to a steady stream of positive news, good earnings, and raised guidance.
Analysts will give a stock an overweight recommendation if they feel that the stock's expected return will be greater than the average return of the industry or market over a given time period. Analysts may also provide a price target when they give a stock an overweight rating.
For example, assume company ABC is in the biotech sector, has a drug for lung cancer and is currently trading at $100. Suppose the company releases positive data and receives FDA approval, and the stock increases by 25%. Analysts may give their opinion based on this news and rate the stock overweight with a price target of $175 for the fiscal year.
Analysts may also give a stock an overweight rating due to positive earnings and raised guidance. For example, assume company DEF, a technology company, releases its quarterly earnings results and beats its earnings per share and revenue estimates. In addition, the company raises its full-year earnings per share and revenue guidance by 25%.
The stock increases by 10%, after its earnings release, from $80 to $88 per share. Suppose the sector has been underperforming the market and its stock price decreases by 20% year-to-date while company DEF's stock price increases 25% year-to-date.
Analysts may give the stock an outperform rating with a price target of $150 because they expect returns to outperform the industry since the stock is appreciating while the sector is depreciating.