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Prudential simplifies stock ratings

The brokerage trims its categories for stock ratings from four to three--"buy," "hold" and "sell"--to make matters more understandable for individual investors.

Prudential Securities has decided to simplify things, announcing that it will trim its categories for stock ratings from four to three.

The firm will now use the ratings "buy," "hold" and "sell" when evaluating stocks. Previously it had rated stocks "strong buy," "accumulate," "hold" or "sell."

The new ratings have specific meanings. According to a report issued by the brokerage house, a "buy" rating means Prudential thinks the company has a minimum potential return of 20 percent over the next 12 months, while a "sell" rating indicates expectations of a 20 percent drop. Stocks that fall in between will get the "hold" rating.

Prudential will also rate various industries as "market outperform," "market perform" and "market underperform," based on how a particular industry compares with the entire market.

"We simplified that to make them more clear and more easily understandable by individual investors," said Prudential spokesperson Susan Atran.

Ratings issued by research firms can be rather dizzying for the uninitiated investor. Though "accumulate" sounds like an exhortation to go out and buy a stock, it often means quite the opposite.

First Call, which tracks analysts' ratings of stocks, asks analysts to translate their in-house terms to a 5-point rating system, with 1 being the highest, said research associate Steve Rigo.

And although analysts almost always have a "sell" rating available, it's rarely used.

Rigo said that, historically, less than 1 percent of stocks tracked by the company have ratings of 4 or 5, which are considered a sell. That percentage has risen slightly with the economic downturn, to about 1.5 percent of stocks, he said.

Many analysts simply drop coverage of a stock rather than issue a sell rating.

"Analysts are not always willing to give (a low rating)," Rigo said. "If stock has lost all its value, and there's no visibility, they would want to pick up coverage of something more potential."