Broker Recommendations vs. Zacks Rank: Which is More Reliable?Broker Recommendations vs. Zacks Rank: Which is More Reliable? Introduction: Investors often rely on Wall Street analyst recommendations when making buy/sell/hold decisions. However, are these recommendations truly reliable? Let’s examine the accuracy and usefulness of broker recommendations compared to the Zacks Rank. Case Study: Micron Technology (MU) Micron’s average brokerage recommendation (ABR) is 1.15 (Strong Buy). However, it’s important to note the following: * 88.9% of recommendations are Strong Buy or Buy. * Brokerage firms have a self-interest in stocks they cover, which may bias their recommendations. * According to studies, broker recommendations have limited success in predicting price appreciation. Zacks Rank: A More Reliable Indicator The Zacks Rank, a quantitative model based on earnings estimate revisions, has an impressive audited track record. It classifies stocks into 5 groups: * Strong Buy (Rank #1) to Strong Sell (Rank #5) Unlike broker recommendations, the Zacks Rank is not biased by self-interest and is based on empirical research that shows a strong correlation between earnings estimate revisions and near-term stock price movements. Key Differences between ABR and Zacks Rank * Calculation: ABR is based on broker recommendations, while Zacks Rank is based on earnings estimate revisions. * Scale: ABR uses a decimal scale, while Zacks Rank uses whole numbers (1-5). * Timeliness: ABR is not necessarily up-to-date, while Zacks Rank is updated regularly to reflect changes in earnings estimates. Micron’s Zacks Rank and Investment Potential Micron’s Zacks Consensus Estimate for the current year has increased significantly. This optimism among analysts, evidenced by upward earnings revisions, could be a reason for a potential stock price increase in the near term. Micron’s buy-equivalent ABR supports the Zacks Rank #2 (Buy) recommendation, indicating that investors may consider it a worthwhile investment. Conclusion: While broker recommendations can be useful for validating research, they should not be the sole basis for investment decisions. The Zacks Rank, with its strong correlation to earnings estimate revisions and objective methodology, is a more reliable indicator of a stock’s price movement potential. By considering both ABR and Zacks Rank, investors can make more informed investment choices.
Wall Street analyst recommendations are often used by investors to decide whether to buy, sell, or hold a stock. Media reports of these broker-hired (or sell-side) analysts changing their ratings often have an impact on a stock’s price. But do they really matter?
Let’s see what these Wall Street powerhouses have to say about Micron (MU Quick quoteI – Free Report) before we discuss the reliability of broker recommendations and how you can use them to your advantage.
Micron currently has an average brokerage recommendation (ABR) of 1.15, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on actual recommendations (Buy, Hold, Sell, etc.) from 27 brokerage firms. An ABR of 1.15 is roughly between Strong Buy and Buy.
Of the 27 recommendations that derive the current ABR, 24 are Strong Buy and two are Buy. Strong Buy and Buy account for 88.9% and 7.4% of all recommendations, respectively.
Trends in broker recommendations for MU
View the target price and share forecast for Micron here >>>
The ABR recommends buying Micron, but making an investment decision based on this information alone may not be a good idea. According to several studies, broker recommendations have little to no success in guiding investors in choosing stocks with the most potential for price appreciation.
Wondering why? Because of brokerage firms’ self-interest in a stock they cover, their analysts tend to rate 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 are not always aligned with those of retail investors, and rarely indicate where a stock’s price might actually go. Therefore, the best use of this information might be to validate your own research or an indicator that has proven very successful in predicting a stock’s price movement.
With an impressive outside-audited track record, our proprietary stock rating tool, the Zacks Rank, which classifies stocks into five groups ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), is a reliable indicator of a stock’s near-term price movement. Thus, validating the Zacks Rank with ABR can go a long way in making a profitable investment decision.
ABR should not be confused with Zacks Rank
Although Zacks Rank and ABR both appear on a scale of 1 to 5, they are two completely different metrics.
Broker recommendations are the sole basis for calculating the ABR, which is typically displayed in decimal form (such as 1.28). The Zacks Rank, on the other hand, is a quantitative model designed to harness the power of earnings estimate revisions. It is displayed in whole numbers — 1 through 5.
Analysts employed by brokerage firms are and remain overly optimistic in their recommendations. Because the ratings these analysts issue are more favorable than their research would support due to the self-interest of their employers, they mislead investors far more often than they advise.
On the other hand, earnings estimate revisions are the core of the Zacks Rank. And empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
Furthermore, the different grades of the Zacks Rank are applied proportionally to all stocks for which brokerage analysts provide current-year earnings estimates. In other words, this tool maintains a balance among the five ranks it assigns at all times.
Another key difference between the ABR and the Zacks Rank is freshness. The ABR is not necessarily up-to-date when you look at it. But since brokerage analysts keep revising their earnings estimates to account for a company’s changing business trends, and their actions are reflected in the Zacks Rank soon enough, it is always timely to indicate future price movements.
Is MU a good investment?
In terms of earnings estimate revisions for Micron, the Zacks Consensus Estimate for the current year has risen 100.6% over the past month to $1.16.
The growing optimism among analysts about the company’s earnings prospects, as evidenced by the broad consensus among them to upgrade earnings per share estimates, could be a legitimate reason for a strong stock price increase in the near term.
The magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #2 (Buy) for Micron. You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Therefore, the buy-equivalent ABR for Micron can serve as a useful guide for investors.
