The short answer: it depends.
The long answer..
Off the top of my head, there are quite a number of factors that an analyst may look at when analyzing a stock, to come up with a recommendation. Some example factors to look at include:
- Trading volume
- Moving average
- Fundamental analysis
- Price momentum
- Credit worthiness
- Strength of balance sheet
- Future outlook for the sector
- Product pipeline
- Dividend growth
- Employee turnover rate
- Sales per Square Meter of store space
- Asset turnover
- Age of capital assets
- Supply pipeline (e.g. does the company buy supplies (inputs) for its products from only ethical sources?)
- ...etc.
The list goes on. Quite literally, any and all factors are fair game for a recommendation. So, the question isn't really what analysts do with financial data, it is what do analysts do with financial data that meets your investment needs?
As an example, if you have two analysts, one who is focused on growth stocks, and one who is focused on dividend growth, they may have completely different views on a company. If both analysts were to analyze Apple (AAPL) 5 years ago, the dividend analyst would likely say SELL or at the most HOLD, because back then Apple did not have a dividend. However, an analyst focused on growth would likely have said BUY, because Apple appeared to be on a clear upward trend in terms of growth.
Likewise, if you have analysts who are focused on shorting stocks, and ones who are focused on deep value investing, the sell analyst may be selling SELL because they are confident the stock will go down in price, so you can make money on the short position. Conversely, the deep value investor may be saying BUY, because they believe that based on the companies strong balance sheet, and recent shake-ups in management the stock will eventually turn around. Two completely different views for the same company: the analyst focused on shorting is looking to make money by capitalizing on falling share price, while the analyst focused on deep value is looking for unloved companies in a tailspin whom s/he believe will turn around, the thesis being that if you dollar-cost-average as the price drops, when it corrects, you'll reap the rewards.
That all said, to answer the question about what analysts look for:
- A growth analyst may be focused on things such as future earnings growth, future revenue growth, mixed with decreasing operational costs, and product pipeline: earnings growth roughly translates into higher share prices, and if you are chasing growth, you want companies whose bottom lines are going up on a consistent basis.
- An analyst focused on dividends may be focused on the dividend payout ratio, dividend growth history, and earnings growth. They wouldn't necessarily care about capital appreciation vis-a-vis a rising stock price, since they are concerned primarily with the income stream a company produces, the and the probability that the dividend will increase (or at least be maintained).
- An analyst in the health care sector may be interested in the product pipeline, the company's history of R&D, the company's history of acquisitions (e.g. buying new products vs. building new products), or the probability of that company being bought out by a larger competitor (e.g. A firm in Stage III of clinical, with a relatively small valuation would be a great takeover target for a larger pharmaceutical).
So really, you should be looking for analysts who align with your investment style, and use those recommendations as a starting point for your own purchases. Personally, I am a dividend investor, so I have passed many BUY recommendations from analysts and my former broker because those were based on growth stories. That does not mean that the analysts, my former broker, or myself, are wrong. But we were all incorrect given the context of how I invest, and what they recommend.
