Stock recommendations.

Stock recommendations are underpinned by the analyst company valuation. So choosing a recommendation actually starts with the analyst valuing the company using the normal techniques that starts with forecasting the cash flows and earnings of a company using quantitative and qualitative analysis and increasingly these forecasts also incorporate environmental social and governance considerations that could impact on those earnings and cash flow forecasts. The analyst uses these forecast to either the company either using violation multiples or using discounted cash flow methods. The company valuation is either current or for some firms is on a one year forward basis. Essentially identifying what the company will be worth in one year's time the analyst then divides the company valuation by the share count of the company to give a target price. This target price is what the analyst believes that the shares are worth based on their own valuation, and this target price can then be compared to the current traded share price of the company. If the target price exceeds the current share price the shares are described as having "upside potential" as someone investing in the shares would generate upside if the share's repriced to the analyst's target price. This means that investors should want to buy this stock if they believe the analysts views. If the target price is below the current share price, the shares are described as having "downside potential" as someone investing in the shares would generate downside if the shares repriced to the analysts target price. This means that investors should want to sell this stock if they believe the analysts views. The analyst therefore uses this Target price to drive the investment rating, a buy, sell, or hold recommendation. A buy rating would normally result from a target price which exceeds the current share price, and a sell recommendation normally results from a target price, which is lower than the current share price. A hold recommendation normally results where there's no major difference between the target price and current share price typically analyst would want to decent amount of upside or downside to give a buy or sell rating as this demonstrates that the analyst has conviction in their views. Meaning that they are confident that their views differ materially from what is being priced in by the market. An important takeaway here, is that stock recommendations do not reflect whether the analyst thinks the company is good or bad. Nor does it reflect expectations of whether the company will do well or badly in the future. It reflects whether the analyst believes the stock is under or overvalued by the market. However, the actual rating decision will also consider a number of other factors. For example, the recent trading range a recent fall in the share price suggests that shares have repriced for negative news on the company or industry recently. And this may make an analyst less inclined to provide a sell recommendation if their target price is below the current share price. Valuation sensitivities are also an important factor if the analyst has run scenario analysis on their valuation which provides a very wide range of potential valuations. This may reduce an analyst conviction over their target price and their ability to provide a buy or sell recommendation finally risks to the thesis and catalysts, we're going to cover these later, but these can also affect an analyst conviction over the recommendation.