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. Chevron (CVX) before we discuss the reliability of broker recommendations and how to use them to your advantage.
Chevron’s average brokerage recommendation (ABR) is currently 1.70 on a scale of 1 to 5 (strong buy to strong sell) calculated based on actual recommendations (buy, hold, sell, etc.) made by 23 brokerages firms. An ABR of 1.70 is roughly between a strong buy and a buy.
Of the 23 recommendations defining the current ABR, 14 are Strong Buy and two are Buy. Strong “Buy” and “Buy” calls respectively account for 60.9% and 8.7% of all recommendations.
Brokerage Recommendation Trends for CVX
Check Chevron’s stock price target and forecast here>>>
ABR suggests buying Chevron, 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.
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 movements. Therefore, it would be better to use this information to test your own analysis or a tool that has proven to be highly effective 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, the various Zacks Rank ratings 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 its five ranks.
Another key difference between the ABR Rank and the Zacks Rank is freshness. ABR isn’t necessarily up to date if you look at it. But because brokerage analysts continually revise their earnings estimates based on a company’s changing business trends, and their actions are reflected fairly quickly in the Zacks Rank, it is always an early indication of future price movements.
Is it worth investing in CVX?
In terms of Chevron’s earnings estimate revision, the Zacks Consensus Estimate for the current year has moved 3.2% lower over the past month to $10.74.
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, as well as three other factors related to earnings estimates, has led to a Zacks Rank #5 (Strong Sell) for Chevron. You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Thus, it would be wise to take Chevron’s purchase-equivalent ABR with a grain of salt.
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Chevron Corporation (CVX): Free Stock Analysis Report
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