- 1Wall Street ratings are subjective and often biased toward "Buy"
- 2Quantitative ratings are systematic and bias-free
- 3Academic research shows quant models outperform analyst recommendations
- 4The best approach may combine quantitative screens with fundamental analysis
#Types of Stock Ratings
Wall Street Analyst Ratings
How they work: Equity analysts at investment banks and research firms study individual companies. They build financial models, talk to management, analyze industry trends, and issue ratings (Buy, Hold, Sell).
Pros: - Deep company-specific knowledge - Can identify catalysts and risks - Qualitative insights (management quality, competitive position)
Cons: - Subject to bias (underwriting relationships, access to management) - Overwhelmingly positive (studies show 90%+ are Buy or Hold) - Time-consuming and expensive - Inconsistent methodologies across analysts
Quantitative Rating Systems
How they work: Algorithms evaluate stocks based on measurable characteristics—profitability, momentum, valuation, etc. Every stock is scored using the same methodology.
Pros: - Consistent and unbiased - Scalable (can rate thousands of stocks) - Transparent methodology - Based on factors with academic validation
Cons: - Misses qualitative factors - Can be slow to react to company-specific events - Requires historical data (struggles with IPOs) - May miss nuance that analysts catch
#The Evidence: Who Wins?
Academic research consistently shows quantitative approaches outperform analyst recommendations:
Jegadeesh et al. (2004)
Study of analyst recommendations vs. quant strategies. Found that simple quantitative screens (momentum, earnings revisions) outperformed analyst stock picks.
Bradshaw, Brown & Huang (2013)
Analyzed 20 years of analyst recommendations. Found systematic positive bias and minimal predictive value beyond what's captured in quantitative factors.
#The Analyst Bias Problem
Wall Street ratings have a well-documented problem: they're almost never negative.
| Typical distribution: | |
|---|---|
| -------- | ------------ |
| Buy/Strong Buy | 45-55% |
| Hold | 40-45% |
| Sell/Underperform | 5-10% |
If 90%+ of stocks are rated Buy or Hold, what information does that provide?
Why the bias exists: - Investment banks earn fees from companies they cover - Negative ratings harm relationships with management - Career risk for analysts who are wrong and negative
Quantitative models have none of these biases.
#What Our Ratings Mean
Unlike Wall Street's "almost everything is a Buy" approach, our ratings use AQR-style fixed score thresholds — stars are assigned by absolute score quality, not forced distribution:
| Stars | Score Threshold | Rating |
|---|---|---|
| ★★★★★ | Score >= 75 | Strong Buy |
| ★★★★☆ | Score >= 65 | Buy |
| ★★★☆☆ | Score >= 50 | Hold |
| ★★☆☆☆ | Score >= 40 | Reduce |
| ★☆☆☆☆ | Score < 40 | Avoid |
A 3-star rating means the stock scores between 50 and 64—solid but not exceptional. This threshold-based system is more informative than a system where everything is "Buy."
#The Bottom Line
Wall Street analyst ratings suffer from systematic bias and inconsistent methodology. Quantitative ratings are transparent, unbiased, and grounded in academic research.
Neither approach is perfect. But if you have to choose, the evidence favors systematic, factor-based analysis.
#Academic Sources
- Jegadeesh, N., Kim, J., Krische, S., & Lee, C. (2004). "Analyzing the Analysts: When Do Recommendations Add Value?" Journal of Finance
- Bradshaw, M. T., Brown, L. D., & Huang, K. (2013). "Do Sell-Side Analysts Exhibit Differential Target Price Forecasting Ability?" Review of Accounting Studies
Last updated: February 1, 2026