Investing > Overweight Stock

Overweight Stock

The heavier the stock, the more upside it could have. Find out how hefty assets can bolster your portfolio.

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Updated January 08, 2022

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Ever feel like your portfolio needs a bit more oomph?

Ambitious investors are always looking for an edge to beat the average on the stock market. One way that investors can do this is by beefing up their portfolios with overweight stocks—these heavyweight assets will help you swing above the average. 🥊

While making better returns will help with any investing plans, it’s even more important when some analysts see us on the verge of a bear market. Learning how overweight stocks work gives you valuable insight into what picks are better for your portfolio. 

Knowing what these assets are will expand your investing lexicon and keep you informed. So, what are overweight stocks, how do you identify them, and how do you use them to make money? Let’s find out. 👇

What you’ll learn
  • What Does Overweight Stock Mean?
  • Importance of Portfolio Diversity
  • Why Stocks are Weighed
  • Examples of Overweight Stocks
  • Overweight Stock Rating Systems
  • Pros and Cons of Going Overweight
  • How Analysts Determine 'Overweight'
  • Using Indices as Benchmarks
  • How to Invest in Overweight Stocks
  • Final Note
  • FAQs
  • Get Started Trading Stocks

What Does Overweight Stock Mean? 🔎

If you watch financial news or listen to what analysts have to say, you may have heard the term overweight being thrown around. It may seem counterintuitive at first that being overweight is a good thing. After all, it sounds like the company may need to trim back. 

What people actually mean when they say a company is overweight is that investors are bullish on the asset. They see the company growing and outcompeting similar businesses in the next 8 to 12 months.

The term overweight is used as an expression of your overall portfolio or an index in general. When a company is overweight it should outweigh other assets. Overweight stocks have good prospects for continued profitability. 

Overweight status comes from the normal indicators that we see with good companies. Good decisions being made by management, important proprietary patents being secured, and indicators of market growth.

For some investors, It’s good to keep a balanced and diverse portfolio with stocks and bonds. This keeps you safe from excessive risk and keeps you seeing modest, but consistent returns. However, having a less diverse portfolio may mean that you are exposed to greater potential gains.

Losing portfolio diversity can be a good thing, and when the analysts say a stock is overweight, it may be time to load up on that asset. Trimming some of the less desirable underweight stocks, and instead betting on businesses that are seeing strong growth. All of this converts to greater profitability for you. 🤑

Importance of Portfolio Diversity 🗂

While overweight stocks can make excellent investment vehicles, keeping some diversity in your portfolio can be a good way of dealing with underperformance. Insulating from risks isn’t always the best way of making extreme gains, but it can keep you from hitting the sale button when things look bleak. It’s easier seeing your account down by 5% instead of 50%. 

On the other hand, having some overweight stocks in your portfolio can help the other assets look better. A few securities that are beating the average while the rest of your investments are staying the course will make your entire account look better.

There are several options available from top stock brokers for investors that want to maintain diversity while staying overweight in a sector they are confident in. These can come in mutual funds or even Exchanged Traded Funds. There are all kinds of ETFs for investors who believe in the possibility of greater returns in tech, energy, or even cannabis. 

For investors who don’t have the time to manually track each company in their account, ETFs and mutual funds present an opportunity to get higher returns without spending too much time reading trades and doing fundamental analysis.

Why Stocks are Weighed 🏋️‍♀️

Stocks are weighed because it helps investors and analysts classify and understand a more realistic impact of certain assets against benchmarks. This means that bigger companies have a larger representation in indexes and portfolios. 

For example, the S&P 500 is the most commonly used index in America and it is composed of the 500 largest companies. Weighing is imported so that the largest companies don’t take up the same percentage of the index as the smallest companies. Instead, every company represents a proportional amount of their market capitalization relative to other businesses.

This is important because it gives a more accurate representation of the market. It also means that when you are composing your own portfolio you can avoid investing too heavily in one asset.

Advisors often recommend that you don’t put too much of your portfolio into one stock because it may expose you to an excessive amount of risk relative to the potential reward. Risk indicators such as the beta are important to understand why a stock might be excessively risky.

The majority of people aren’t constantly evaluating and redistributing the weight of assets in a major index though. For most people, it’s simply good enough to know that an overweight stock is likely a good buy, while underweight stocks are trending downwards.

Examples of Overweight Stocks 👇

The market is constantly changing and so finding the right time to purchase stocks is key to staying profitable. Even now, analysts are seeing more movement in recovering markets, opening the door for investors to make a profit. Keeping your eye on what is overweight and what is underweight can be incredibly helpful when trying to beat trends.

Recently the tech industry overall has been performing very well when compared to the rest of the stock market. Over the past year, the ETF QQQ, which is weighted more heavily in favor of the largest tech companies on the S&P 500, has returned an additional 4% profit to investors when compared with a standard S&P 500 ETF. Any extra percent is important, especially for investors who are worried about peaking inflation.

SPY compared
SPY compared to QQQ in 2020 and 2021. Image by TradingView.

Investors who invested more heavily in the tech sector for this period of time would have more to show for their money than individuals who decided to stick with an even distribution. While investors who bought QQQ were exposed to greater risk and more volatility, the gains have been greater.

Another tech company that is often considered overweight is Nvidia. Analysts have been expecting strong returns from this company given their dominant market share and their products that are difficult to produce. 

Comparing NVDA to QQQ
Comparing NVDA to QQQ in 2020 and 2021. Image by TradingView

Here, we can see that while QQQ performed comparable levels to the S&P 500 for the past three months. During that same time period, it was massively outperformed by the overweight stock NVDA. 

While QQQ presented more diversity and insulation than just buying a single security, we can see that the lack of diversity could have produced greater gains for investors. It isn’t always just industries that are propped up. 

While QQQ gives a good representation of tech companies it is also important to remember that investors can drill down further and find the specific companies that are making an entire sector seem more attractive. This especially becomes more evident when dealing with massive market cap companies like Amazon or Apple. This same technique can be used when looking at the stock market from day to day as a few companies and some good news can drive up the entire market.

In the stock market, there are no sure things. Even when a stock is overweight, that doesn’t mean the company can’t have a bad report or miss earning goals and thus drive the price down. Something that happened to Peloton after disappointing news emerged about new product lines.

Peloton price changes
Peloton (PTON) price changes in early 2021. Image by TradingView.

Although it was considered overweight earlier in May and April, PTON dropped sharply based on poor news and underwhelming earnings. It’s difficult for investors to anticipate news like this and is one of the reasons that some might want to avoid investing too heavily in any one company.

Sometimes it’s not a single disappointing factor that leads to a company’s downtrend. For instance, Oracle beat expected earnings and still saw their stock decline. Therefore, relying on stock weighing is not an exact science.

Overweight Stock Rating Systems 🌡️

There are several different weighting systems employed by different investment firms. Knowing what an overweight and underweight stock is means you have the basics down in deciphering other jargon. Terms will change depending on where you get your news from and what tools you use to analyze markets.

A popular metric has been the 3-tier rating system where a firm will issue recommendations of sell, hold, or buy. Sell correlates to underweight and buy correlates to overweight stocks. Hold stocks would be those companies that aren’t showing strong trends for over or underperformance.

Stocks that indicate no strong trend can be a good way to protect yourself from the volatility of the market. But investors should be sure they understand why a company or an asset class is stagnating to avoid value traps.

Outside of the 3-tier system, there is also the 5-tier ranking system where stocks will be recommended on a sliding scale of 1 to 5. A rating of one represents the most underweight stocks and a 5 indicates the most overweight companies.

A 5-point stock recommendation scale, showing where “overweight” appears in the spectrum.

Whichever system you are using, the basics are the same. You are looking for companies with strong future performance to load up your portfolio. While at the same time not over-investing in any one area to avoid large losses.

Advantages and Limitations of Going Overweight on a Stock ⚖️

Investing based on overweight and underweight ratings can be a good way to take more control of your investments. You should know the risks involved before you start moving your money around. You should also be working with information that you trust and understand why a company is rated the way it is.

Advantages of Overweight Stocks ✅

The biggest advantage of using overweight stock predictions is that it can help you find better ways to balance your portfolio. This is essential for beating average gains and making more meaningful movements in your accounts.

Going overweight on particular assets can be a great way to hedge against other securities that you hold that are potentially very poor or stagnate. Weighting your portfolio with good stocks helps offset other investments that you may have overbought at one point. It helps you bolster poor performance with greater gains.

Overweighting the portfolio lets you put money in the things you believe in without being excessively reckless. If you have a portfolio that is balanced with stocks, bonds, and other resilient assets like real estate, you are better insulated from potential inefficiencies and inflation. It also means that you are paying closer attention to your portfolio and managing your assets better—this gives you the potential to readjust when you find inefficiencies.

Limitations of Overweight Stocks ⚠️

The major limitation of going overweight on a stock is that you are taking more risk. When you lose on a bet, you lose harder. Investors looking to make bigger moves might make some more money but should have some tissues nearby to deal with the tears of the bad days. 😭

Overweight ratings are not infallible. It’s not uncommon for once overweight stocks to slip into the underweight territory—if there is a catastrophic event in the company, returns can stagnate or worse. Otherwise, the positions might slowly lose ground as a company misses earnings estimates, or if a company is in a cyclical sector.

Either way, you have less of a chance to keep your funds safe than if you are balancing between broader indexes and bonds.  If you are close to retirement, active management likely isn’t for you. It may be best to keep your funds in your retirement account and not touch them. If you are younger, you likely have more time to make up for any excessive risk.

How Analysts Decide if a Stock is Overweight 💡

Analysts rely on a plurality of factors to decide what stocks are overweight. First, you should know that there are generally two terms that people mean when they are referring to overweight stocks. The first is in reference to an individual’s portfolio allocations.

If someone has a brokerage account and is invested in the S&P 500, but they have decided to put more money into certain sectors, they are overweight in those sectors. 

For example, if the S&P 500 has a total allocation of 10% of its capitalization in agricultural funds, but someone is confident in agriculture because of the increases in food prices and they decide to make their portfolio 20% agriculture, then that portfolio is overweight. It’s a great idea to bet on the farmers when the inflation-proof avocados go flying off the shelf.

That all makes enough sense, what most people really care about is what analysts mean when they talk about overweight stocks. And the worst part about that is it’s going to depend on the analysts looking at the stocks.

Normally, when analysts are talking about stocks they are going to give a buy rating as we have discussed previously. These ratings are relative to the strength that the company is showing in relation to its sector and the overall market, and the ratings can be pretty subjective because they are speculative.

Generally, following one investment firm or analyst will give you a more consistent and logical rating of stocks. This is because the person rating that stocks will have a consistent rationale. 

Weighing stocks can depend on many factors such as the potential for expansion, important technologies, market disruption, management, and even increasing wages. Looking at what many analysts have to say about a certain asset can give you a better idea about the consensus on a company. 

Using Indices as Benchmarks ✔️

To understand what analysts are talking about in a larger context, we have to know a little bit about indices. Indices are basically a group of stocks that investors use to categorize the market. The S&P 500 is one such index and it contains the 500 largest companies that are publicly traded in the US.

Of course, different companies will compose a different percentage of this index because there are massive global corporations on their lists like Apple and Amazon. There are also companies worth only a fraction of these businesses such as Nordstrom or Gap.

When an analyst is saying that a stock is overweight, they mean that they think the company should compose a higher percentage of the index or benchmark they are using. This is based on speculative observation.

How to Invest in Overweight Stocks 📈 

Investing in overweight stocks can be as easy as reading the news, setting up an account with a top stockbroker, and throwing your life savings into one asset. That’s probably also a really easy way to lose all your money.

Investors should know that stock ratings are just recommendations and they can come from people who don’t need to disclose their open positions in these companies. Analysts and investment firms are fallible and they won’t be on the hook for your potential losses. So before you make a purchase, do some stock research.

Another important factor to keep in mind is the reason that you are investing. Are you trying to save for a large purchase? Put money away for retirement? Fund your illicit weasel racing circuit? 

Whatever the reason you’re investing, you should know how long you can afford to keep your money in the market. Overweight stocks may only have a bright future for the next 8 months, while your horizon is 10 years. You would need to adjust as you go, and they may introduce tax liabilities and a greater potential for loss.

The best way to invest in overweight stocks is to consider all of the reasons you are investing, figuring out your investment plan and timeline, and balance your portfolio based on an index or a mutual fund with adequate allocations based on your risk. 

After you have created a diverse portfolio, some traders recommend using a portion of your account for speculation. Maybe just 5-10% of the total funds in the account. You can adjust your speculation based on your risk tolerance—it’s better to start with smaller risks and adjust once you better understand how much it pains you to lose money on the market.

Final Note 🏁

You’ve figured out how weighing stocks works. Good for you! Give yourself a pat on the back, or if that’s not your thing, maybe just get to researching some stocks. It’s good to know what the analysts are talking about as they blather on about the flavor of the day stock. Now that you know what they’re saying you’re better equipped to make good trades.

In the end, their recommendations are just speculation. If you decide to put your money on the line, you’ll be on the hook for losses. But for the money you make, that might just be worth it.

Overweight Stock: FAQs

  • Should You Buy Overweight Stock?

    You should do your own analysis before purchasing any asset. While it may be tempting to follow the herd and simply buy whatever asset everyone else is buying, you’re going to be on the hook if trades go south. Buying an overweight stock is normally a good idea because they have good prospects in the short term. For long-term investors, it may be best just to keep your money in your mutual fund or ETF.

  • How Can I Tell if a Stock is Outperforming the Market?

    You can tell if a stock is outperforming the market by measuring its recent performance against an average indicator like the S&P 500. If the growth of a stock is greater than the S&P 500, then it is outperforming that market.

  • What is an “Outperform” Stock Rating?

    In stocks, an outperform rating means that one asset will see more growth than similar assets. Sometimes this means that a stock is likely to outperform the entire market, and sometimes it’s just outcompeting other similar companies

  • What Does an Overweight Rating from JP Morgan Mean?

    When JP Morgan issues an overweight rating for a particular asset, that means that the analyst at that firm thinks the asset they’ve chosen is likely to rise over a set period of time. Overweight ratings mean that investors should consider increasing the amount of an asset in their portfolio.

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All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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