Investors often look to recommendations from Wall Street analysts before making a decision to buy, sell or hold a stock. While media reports of rating changes by these analysts employed by brokerage firms (or salespersons) often affect a stock’s price, do they really matter?
Let’s take a look at what these Wall Street heavyweights have to say about Procter & Gamble (PG) before discussing the reliability of brokerage recommendations and how to use them to your advantage.
P&G currently has an Average Brokerage Recommendation (ABR) of 1.63, on a scale of 1-5 (strong buy to strong sell), calculated based on actual recommendations (buy, hold, sell, etc.) made by 12 brokerage firms. An ABR of 1.63 approximates between Strong Buy and Buy.
Of the 12 recommendations that derive from the current ABR, seven are Strong Buy and two are Buy. Strong Buy and Buy account for 58.3% and 16.7% of all recommendations, respectively.
Broker Recommendation Trends for PG
Check Price Target and Inventory Forecast for P&G here>>>
Although the ABR calls for the purchase of P&G, it may not be wise to make an investment decision based on this information alone. Several studies have shown limited, if any, success with brokerage recommendations in guiding investors in choosing stocks with the best potential for price increases.
You wonder why ? Due to brokerage firms’ vested interest in a stock they are covering, their analysts tend to rate it with a strong positive bias. According to our research, brokerage firms award five “Strong Buy” recommendations for every “Strong Sell” recommendation.
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
Although Zacks Rank and ABR are displayed in a range of 1-5, they are completely different metrics.
The ABR is calculated solely based on brokerage recommendations and is usually displayed with decimals (example: 1.28). In contrast, Zacks Rank is a quantitative model allowing investors 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.
In contrast, the Zacks ranking is determined by earnings estimate revisions. And short-term stock price movements are strongly correlated with trends in earnings estimate revisions, according to empirical research.
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 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 PG?
Looking at earnings estimate revisions for P&G, the Zacks consensus estimate for the current year rose 0.3% over the past month to $5.84.
Analysts’ growing optimism about the company’s earnings outlook, as indicated by the strong agreement among them to revise EPS estimates upwards, could be a legitimate reason for the stock to soar 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 No. 2 (buy) ranking for P&G. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Therefore, the ABR equivalent to buy for P&G can serve as a useful guide for investors.
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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.