Investors often look to recommendations made by Wall Street analysts before making a Buy, Sell or Hold decision on a stock. While media reports about rating changes by these hired (or sold) brokerage firms often affect a stock’s price, do they really matter?
Before we discuss the reliability of brokerage recommendations and how to use them to your advantage, let’s see what these Wall Street heavyweights think. Amazon (AMZN).
Amazon currently has an average brokerage recommendation (ABR) of 1.11, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on current recommendations (Buy, Hold, Sell, etc.) made by 46 brokerage firms . An ABR of 1.11 approximates between Strong Buy and Buy.
Of the 46 recommendations that make up the current ABR, 42 are Strong Buy and three are Buy. Strong Buy and Buy account for 91.3% and 6.5% of all recommendations, respectively.
Brokerage recommendation trends for AMZN
Check the price target and stock forecast for Amazon here >>>
While ABR calls for buying Amazon, it may be unwise to make an investment decision based on this information alone. Some studies have shown limited to no success of brokerage recommendations in guiding investors to select stocks with the best price growth potential.
I wonder why? As a result of brokerage firms’ vested interest in a stock they cover, their analysts tend to value it with a strong positive bias. According to our research, brokerage firms assign five “Strong Buy” recommendations for every “Strong Sell” recommendation.
This means that the interests of these institutions are not always aligned with those of retail investors, providing little insight into the direction of future stock price movement. Therefore, it would be better to use this information to validate your analysis or a tool that has proven to be very effective in predicting stock price movements.
Zacks Rank, our proprietary stock rating tool with an impressive externally audited track record, categorizes stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell) and is an effective indicator of stock price performance in the near future. Therefore, using ABR to validate the Zacks Rank can be an efficient way to make a profitable investment decision.
Zacks Rank should not be confused with ABR
Although both Zacks Rank and ABR are displayed on a range of 1-5, they are completely different measures.
ABR is calculated based on brokerage recommendations only and is usually displayed in decimal numbers (example: 1.28). In contrast, Zacks Rank is a quantitative model that allows investors to harness the power of earnings estimate revisions. Displayed as whole numbers — 1 to 5.
It has been and continues to be the case that analysts employed by brokerage firms are overly optimistic with their recommendations. Because of the vested interests of their employers, these analysts issue more favorable valuations than their research would support, misleading investors far more often than helping them.
In contrast, the Zacks Rank is driven by earnings estimate revisions. And short-term stock price movements are strongly related to trends in earnings revisions, according to empirical research.
Additionally, the various Zacks Rank grades are applied proportionately to all stocks for which brokerage analysts provide earnings estimates for the current year. In other words, at all times, this tool maintains a balance between the five ranks it assigns.
Another key difference between ABR and Zacks Rank is freshness. ABR is not necessarily up to date when you view it. But since brokerage analysts keep revising their earnings estimates to account for changing trends in a company’s business, and their actions are reflected in the Zacks Rank fairly quickly, it’s always timely to tell future price movements. .
Should you invest in AMZN?
In terms of earnings estimate revisions for Amazon, the Zacks Consensus Estimate for the current year has risen 11.8% over the past month to $4.03.
Analysts’ growing optimism about the company’s earnings prospects, as indicated by strong agreement among them in revising higher EPS estimates, could be a legitimate reason for the stock to rise in the short term.
The size of the recent change in consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #1 (Strong Buy) for Amazon. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Therefore, Amazon’s Buy-equivalent ABR can serve as a useful guide for investors.
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Amazon.com, Inc. (AMZN): Free Stock Analysis Report
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