Recommendations from Wall Street analysts are often used by investors to decide whether to buy, sell or hold a stock. Media reports of those analysts employed by brokerage firms (or sellers) changing their ratings often affect a stock’s price. Do they really matter, though?
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. walmart (WMT).
Walmart currently has an Average Brokerage Recommendation (ABR) of 1.69, on a scale of 1-5 (strong buy to strong sell), calculated based on actual recommendations (buy, hold, sell, etc.) made by 27 brokerage firms. An ABR of 1.69 approximates between Strong Buy and Buy.
Of the 27 recommendations that derive from the current ABR, 16 are Strong Buy and three are Buy. Strong Buy and Buy account for 59.3% and 11.1% of all recommendations, respectively.
Broker Recommendation Trends for WMT
Check the price target and stock forecast for Walmart here>>>
The ABR suggests buying Walmart, but making an investment decision based on that information alone might not be a good idea. According to several studies, brokerage recommendations have little or no success in guiding investors in choosing stocks with the greatest potential for price appreciation.
You wonder why ? The direct interest of brokerage firms in a stock they are covering often results in a strong positive bias from their analysts in rating it. 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, rarely indicating where a stock’s price might actually be heading. Therefore, the best use of this information might be to validate your own research or an indicator that has proven to be very effective in predicting a stock’s price movement.
Zacks Rank, our proprietary stock rating tool with an impressive externally audited track record, classifies stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), and is an effective indicator of the value of a share. price performance in the near future. Therefore, using the ABR to validate the Zacks ranking could be an effective way to make a profitable investment decision.
Zacks rank should not be confused with ABR
Despite the fact that Zacks Rank and ABR both appear on a scale of 1-5, they are two completely different metrics.
Broker recommendations are the sole basis for calculating ABR, which is usually displayed in decimals (like 1.28). The Zacks Ranking, on the other hand, is a quantitative model designed to harness the power of earnings estimate revisions. It is displayed in whole numbers — 1 to 5.
Analysts employed by brokerage firms have been and continue to be overly optimistic about their recommendations. Since the ratings assigned by these analysts are more favorable than their research would support due to the self-interest of their employers, they deceive investors far more often than they guide them.
On the other hand, earnings estimate revisions are central to the Zacks ranking. And empirical research shows a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
In addition, the various Zacks Rankings ratings are applied proportionately to all stocks for which brokerage analysts provide current year earnings estimates. In other words, at all times, this tool maintains a balance between the five ranks it awards.
Another key difference between ABR and Zacks Rank is freshness. The ABR is not necessarily up to date when you consult it. But, given that brokerage analysts are constantly revising their earnings estimates to reflect changing business trends of a company, and their actions are reflected in the Zacks rankings fairly quickly, it is always appropriate to indicate future price movements.
Should you invest in WMT?
In terms of earnings estimate revisions for Walmart, Zacks consensus estimate for the current year was unchanged over the past month at $6.08.
Analysts’ consistent views on the company’s earnings outlook, as indicated by an unchanged consensus estimate, could be a legitimate reason for the stock to perform in line with the broader market in the near term.
The magnitude of the recent shift in the consensus estimate, along with three other factors related to earnings estimates, resulted in a Zacks #3 (Hold) ranking for Walmart. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
So it may be prudent to be a little careful with the ABR equivalent to buying for Walmart.
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Walmart Inc. (WMT): Free Inventory Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.