What Is a Strong Buy?
A strong buy is a recommendation given by analysts for a stock that is expected to dramatically outperform the average market return and/or the return of comparable stocks in the same sector or industry. It represents an analyst's emphatic endorsement of a stock.
A strong buy can be contrasted with a strong sell.
- A strong buy is an analyst's recommendation to purchase shares of a company that, based on analysis, is expected to dramatically outperform in the short- to mid-term.
- A strong buy rating is usually accompanied by an extremely optimistic price target on the stock, such as a 30% to 50% gain over the coming 12 months.
- The strong buy rating isn't nearly as highly regarded as it was only a few years ago. As such, many investment banks currently prefer to stick with the less emotive buy rating.
Understanding a Strong Buy
A stock with a "strong buy" rating is expected to significantly outperform the markets over the near term. A strong buy is the strongest recommendation that an analyst can give to purchase a stock. As with any type of analyst rating, the rating is only relevant until a material event occurs that results in the analyst changing his or her outlook regarding the company. A 'strong buy' means the analyst believes the stock's underlying company is or will soon be experiencing positive financial performance and/or favorable market conditions.
A strong buy rating indicates an analyst has reason to believe the stock will trade drastically higher over the coming months. What exactly those reasons are can vary considerably, but in general, the analyst usually predicts the potential gain in anticipation of some sort of positive event, such as a return to profitability or the launch of a new product. A strong buy writing is usually accompanied by an extremely optimistic price target on the stock, such as a 30% to 50% gain over the coming 12 months.
The strong buy rating isn't nearly as highly regarded as it was only a few years ago. As such, many investment banks currently prefer to stick with the less emotive buy rating.
There is no universal ranking system, so it's important to understand a firm's rating scale in order to know what it means by the terms it uses.
Possible Reasons for Strong Buy Recommendations
- Share price appreciation: When a company’s share price trend shows an impressive run, analysts search for reasons that contribute to that run. If they find that those reasons point to continued strong performance, they may be motivated to issue a strong buy recommendation.
- Estimate revisions: When a company adjusts its revenue estimates for a given time period to indicate stronger expected performance, analysts may echo that sentiment by resetting their recommendation on the stock to a strong buy.
- A history of positive earnings surprises: If a company has a strong track record of outperforming its own performance forecasts, analysts may regard a stock as a superior option compared to competitors, which would make a strong buy rating appropriate.
- Strong growth prospects: If a company does business in a strong industry and they're predicting strong growth, that can be a reason for a strong buy recommendation.
- Growth drivers: If a company makes or contributes to significant technological advancements in a sector, that can earn an analyst's respect and a subsequent strong buy rating.