What Is a Strong Sell?

A strong sell is a type of stock trading recommendation given by investment analysts for a stock that is expected to dramatically underperform when compared with the average market return and/or return of comparable stocks in the same sector or industry. It is an emphatic negative comment on a stock's prospects.

Key Takeaways

  • A strong sell is a stock recommendation from investment analysts that a company will significantly underperform the market or its peers.
  • When reviewing stocks, investment analysts usually provide recommendations, which include buy, hold, or sell.
  • A strong sell is a serious indictment of a company's future share price, which recommends current investors sell the stock and potential investors do not buy the stock.
  • A strong sell recommendation is based on factors that can include poor financial statements, adverse litigation proceedings, unexpected losses, and negative changes in management.

Understanding a Strong Sell

Investment analysts, typically working at investment banks, review and provide their recommendations on company stocks. Their analyses are thorough, involve an examination of financial statements, market and economic factors, and a slew of other material. At the end of their reviews, they typically provide a recommendation on investing in the stock. The recommendation is a variant on one of three: buy, hold, or sell.

A strong sell is one of the strongest recommendations that an analyst can give to investors to sell a stock and generally indicates that the underlying company and/or relevant market conditions will be unfavorable for the stock in the subsequent period of time. They believe that the stock price will decrease going forward, eroding any value for current holders, or be a poor investment choice for potential investors.

Strong Sell Variations

The meaning of ratings issued by analysts can vary from firm to firm, making it necessary to see the documentation that clearly details the intent of any recommendation. What one firm calls a "strong sell" might carry the same meaning as the following recommendations: "significantly underperform," "swap," "long-term avoid," or "sell."

Furthermore, because the findings and opinions of analysts can vary widely, a "strong sell" recommendation from one firm might not coincide with the recommendations for the same time frame on the same stock from another firm. When recommendations are released, a research report may be included to provide corroborating evidence for the new status. In the case of a "strong sell" rating, analysts are expected to outline the underlying fundamentals that led to such a downgrade.

Impact of a Strong Sell

With a "strong sell" rating, an analyst is essentially recommending that the entire stock be removed from shareholders’ portfolios to mitigate further losses. Even if the company is generating revenue, there may be other factors that could impair its forward growth prospects. The impact of these issues could lead to diminishing value on company shares with no swift recovery projected in the short term.

Inciting actions that can lead to such a recommendation can include recent news from the company, such as missed goals, unexpected losses, or regulatory rulings that affect the core operations of the business, coupled with projections on future earnings. A "strong sell" recommendation can take into account how the company is positioned relative to its industry peers; market changes that may affect the company’s operations, liquidity, and capitalization, and actions competitors are taking.

If a company has not presented a plan of action to allay such issues, or if there are other factors that would preclude a near-term recovery, analysts might issue a strong sell recommendation, especially if it is believed the company will underperform for 12 to 24 months.