Are Robinhood Analyst Ratings Reliable?

Wall Street analysts are supposed to provide forecasts to investors about stocks that are trending (most of the time, at least). Brokers often employ such analysts or use a service that does to offer you such forecasts. Robinhood is no different. Are Robinhood analyst ratings reliable, though?

Are Robinhood Analyst Ratings Reliable?: Yes, Robinhood analyst ratings are reliable, but only to the extent that Morningstar ratings are. That’s because Robinhood partners with them to provide you ratings and forecasts. Morningstar has been in the game for decades and their ratings are unbiased, so if you can trust them, you can also trust Robinhood.

Now, in this article, I am going to answer other important questions like if Robinhood offers this service to all clients and how accurate the ratings are, but I will also provide some tips on how to better make use of these ratings to invest properly.

Sounds good? Let’s dive right into it!

Are Analyst Ratings Available to All Customers?

Are Robinhood Analyst Ratings Reliable?
Are Robinhood Analyst Ratings Reliable?

Unfortunately, Robinhood doesn’t offer their ratings and reports to just about everyone. You need to be a Gold member to access them.

If you’d like to give it a try, you can try Gold for free for 30 days. After the trial period ends and you haven’t cancelled your subscription you will be charged $5 and then for every 30 days that you are a Gold member.

With Gold, you will have access to in-depth research reports on 1,700 stocks which will be frequently updated to always reflect the current status of a company. Morningstar analysts will publish new reports near earnings reports filed by a company and when major changes occur regarding management, product launches, and mergers.

How Accurate Are Analyst Ratings?

Now, generally speaking, analyst forecasts are not very accurate. When it comes to ratings, however, ratings given by professional analysts cannot be measured in terms of accuracy because they’re just ratings, not predictions.

Ratings are often accompanied by price predictions though, so we can judge them based on that aspect. A 2012 study of more than 11,000 analysts from 41 countries found that “the overall accuracy of target prices is not very high, averaging around 18% for a three-month horizon and 30% for a 12-month horizon.”

As you can see, you cannot rely on ratings, especially if you are a short-term trader. But accuracy aside, there are far more important reasons that make a complete reliance on ratings a bad idea…

Other Reasons you Cannot Rely On Analyst Ratings

Besides the fact that stock forecasts are worse than weather ones, many of the times analysts have questionable motives. For example, a lot of analysts will have some vested interest in a stock they promote… I mean, report on.

You should look for a disclosure that they have no positions on the stocks they cover before you can trust their qualifications.

Also, you should understand that no one beats the market by basing their investment decisions on analyst ratings.

It’s one thing to use a rating filter on a stock screener to find some opportunities in the market and then do further research and another to wholly base your decision on some rating.

You should know that you’re not the only person who sees these ratings; others do too and they may take the same side of the trade that you do. Following the crowd hasn’t benefited anyone in the long term, to be sure.

In other words, if you want to be a contrarian, ratings are a great way to filter stocks, but a bad way to make a final decision.

The Best Way to Make Use of Analyst Ratings

Now that you understand why you shouldn’t trust ratings to the point where you invest based on them, you will need to know how to use them best. After all, ratings have their place and are not completely irrelevant, even if you’re a contrarian investor.

First of all, you need to dive a little deeper. Try to see why an analyst gives the rating that they do. There are usually reports that accompany these ratings and they probably will shed some light on the matter.

After you read an analyst’s report, then start doing your own due diligence to see if you agree on your valuations and predictions. If you’re new to this, it’s also a great way to test your skills and compare your work to that of a professional analyst.

Be careful not to fall into the trap where you realize that you generally agree with some analyst and then you completely forgo analyzing a stock yourself. No matter how good an analyst is or how well your investment approach matches theirs, this is your money.

It’s never a good idea to rely on someone else when it comes to investing. Especially if you pick stocks by yourself. This way you can at least claim all responsibility for the kind of risk you take.

All in all, use analyst ratings as a filter to make a list of stocks that seem promising and then diver deeper to see if they’re worth your money.

Bottom Line: Are Robinhood Analyst Ratings Reliable?

As I said, Robinhood analyst ratings are as reliable as Morningstar ratings are. The ratings that Morningstar provides are unbiased and they’re a good starting point to analyze a stock.

But just keep in mind that the ratings are accompanied by target price predictions that are not very accurate. So, before you invest in any stock, be sure to analyze it yourself and see if your own predictions match those made by the analyst.

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