When deciding whether to buy, sell or hold a stock, investors often rely on analyst recommendations. Media reports of brokerage firm (or sell-side) analyst rating changes often influence stock prices, but do they really matter?
Let’s see what Wall Street heavyweights have to say about it. Schlumberger (SLB) before we discuss the reliability of brokerage recommendations and how to use them to your advantage.
Schlumberger’s average brokerage recommendation (ABR) is currently 1.22 on a scale of 1 to 5 (strong buy to strong sell), calculated from actual recommendations (buy, hold, sell, etc.) made by 23 brokerages firms. An ABR of 1.22 is roughly between a strong buy and a buy.
Of the 23 recommendations from which the current ABR is derived, 19 are Strong Buy and three are Buy. Strong recommendations “Buy” and “Buy” respectively account for 82.6% and 13% of all recommendations.
Trends in Brokerage Recommendations for SLB
Check Schlumberger’s stock price target and forecast here>>>
ABR suggests buying Schlumberger, but making an investment decision based solely on this information may not be a good idea. According to several studies, broker recommendations do little to help investors select stocks with the greatest potential for price growth.
Are you wondering why? Brokerage firms’ personal interest in the stocks they cover often leads their analysts to have a strong positive bias in their ratings. Our research shows that for every Strong Sell recommendation, brokerage firms assign five Strong Buy recommendations.
In other words, their interests are not always aligned with those of retail investors, and they rarely indicate where the stock price might actually be heading. So, the best use of this information might be to check your own research or an indicator that has proven to be quite successful in predicting stock price movements.
With an impressive, outside-audited track record, our proprietary Zacks Rank stock rating tool, which ranks stocks into five groups ranging from a Zacks Rank #1 (Strong Buy) to a Zacks Rank #5 (Strong Sell), is a reliable indicator of stock price performance in the short term. Therefore, confirming a Zacks Rank with ABR can go a long way in making a profitable investment decision.
ABR should not be confused with the Zacks Rank
Although the Zacks Rank and ABR are measured on a scale of 1 to 5, they are two completely different metrics.
ABR is calculated solely based on brokerage firm recommendations and is typically displayed in decimals (example: 1.28). In contrast, the Zacks Rank is a quantitative model that allows investors to harness the power of earnings estimate revisions. It is displayed as integers – from 1 to 5.
It has been and continues to be the case that analysts employed by brokerage firms are overly optimistic in their recommendations. Because of their employers’ self-interest, these analysts issue more favorable ratings than their research would suggest, misleading investors far more often than helping them.
On the other hand, earnings estimate revisions are at the core of the Zacks Rank. Empirical research shows a strong correlation between earnings estimate revision trends and near-term stock price movements.
In addition, different Zacks Rank levels are applied proportionately to all stocks for which brokerage analysts provide current-year earnings estimates. In other words, this tool always maintains a balance between the five ranks assigned to them.
There is also a key difference between the ABR Rank and the Zacks Rank when it comes to freshness. When you look at the ABR, it may not be current. However, because brokerage analysts continually revise their earnings estimates to reflect changing business trends, and their actions are reflected fairly quickly in the Zacks Rank, predicting future stock prices is always timely.
Is SLB a good investment?
In terms of Schlumberger’s earnings estimate revision, the Zacks Consensus Estimate for the current year has moved 2.6% lower over the past month to $3.40.
Increasing analyst pessimism about the company’s earnings prospects, as evidenced by their strong consensus on downward EPS estimate revisions, could be a legitimate reason for the stock to fall in the near term.
The size of the recent consensus estimate change, along with three other factors related to earnings estimates, has led to a Zacks Rank of #5 (Strong Sell) for Schlumberger. You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Thus, it would be wise to take the buy-equivalent ABR for Schlumberger with a grain of salt.
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