Wall Street analysts’ recommendations are often relied upon by investors when deciding whether to buy, sell or hold a stock. Media reports about these analysts employed by the brokerage firm (or sell-side) changing their estimates often affect the price of a stock. However, do they really matter?
Let’s take a look at what these Wall Street heavyweights have to say Super Micro Computer (SMCI) before discussing the reliability of brokerage recommendations and how to use them to your advantage.
Super Micro currently has an average brokerage recommendation (ABR) of 1.86, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the current recommendations (Buy, Hold, Sell, etc.) of made by seven brokerage firms. An ABR of 1.86 approximates between Strong Buy and Buy.
Of the seven recommendations that issue the current ABR, five are Strong Buy, representing 71.4% of all recommendations.
Brokerage recommendation trends for SMCI
Check the price target and stock forecast for Super Micro here>>>
ABR suggests buying Super Micro, but making an investment decision based on this information alone may not be a good idea. According to some studies, brokerage recommendations have little or no success in guiding investors to select stocks with the greatest potential for price appreciation.
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.
In other words, their interests don’t always align with retail investors, rarely indicating where a stock’s price might go. Therefore, the best use of this information may be to validate your research or an indicator that has proven to be very successful in predicting the price movement of a stock.
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.
ABR should not be confused with Zacks Rank
Although both Zacks Rank and ABR are displayed on a range of 1-5, they are completely different measures.
The broker’s recommendations are the sole basis for calculating the ABR, which is usually shown in decimal numbers (such as 1.28). The Zacks Rank, on the other hand, is a quantitative model designed to harness the power of earnings estimate revisions. Displayed in 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 pro rata to all stocks for which brokerage analysts provide current year earnings estimates. In other words, this tool always maintains a balance between its five ranks.
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. .
Is SMCI a good investment?
In terms of earnings estimate revisions for Super Micro, the Zacks Consensus Estimate for the current year has risen 33.8% over the past month to $21.70.
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 consensus estimate change, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #1 (Strong Buy) for Super Micro. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Therefore, the Buy-equivalent ABR for Super Micro can serve as a useful guide for investors.
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Super Micro Computer, Inc. (SMCI): Free Stock Analysis Report
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