Consensus recommendations are essentially a collection of analyst ratings on a given stock that have been utilized to produce an average analyst recommendation. By identifying the key elements of each analyst recommendation, it is possible to determine what the overall recommendation is for dealing with the stock option. A consensus recommendation may indicate the action of holding onto current shares, buying additional shares, or selling all or part of the shares currently in hand.
In order achieve a consensus recommendation, the findings of each stock analyst will be assigned a number value. The type of recommended action inherent in the individual recommendations carry a different number value for each recommended action. For example, the recommendation to buy would often be identified as a 5, while a recommendation to hold current shares would merit a value of 3. After all the recommendations are identified, the number values are added and the sum divided by the number of analyst recommendations. The resulting figure will represent the consensus recommendation.
As an example, assume that a total of six stock analyst recommendations are collected for a given stock. Three indicate to buy, while one urges the sell of the shares, and two recommend holding the stock. Using the number scale previously mentioned, this would yield a sum of 22, which would then be divided by the number of recommendations collected, which is six. The end result is a consensus recommendation of 3.6, which is rounded to the closest number value of the selections cited, or 3. Thus, the consensus recommendation is to hold the shares for the time being.
It is important to note that while the consensus recommendation is a great way to achieve a broad view quickly, it does not necessarily recommend the best solution for the investor. The criteria used by each analyst may vary, resulting in different opinions based on a wide range of data. For this reason, a consensus recommendation should be considered as an indicator, but not the only data that an investor should consider when making an investment decision.
