Investors often rely on the recommendations of Wall Street analysts when deciding whether to buy, sell or hold stocks. Media reports about these analysts employed by brokerage firms (or by the sell-side) changing their ratings often have an impact on the stock price. Do they really matter though?
Before we discuss the reliability of broker referrals and how to use them to your advantage, let’s see what these Wall Street heavy hitters think CECO Environment (CZECH REPUBLIC – Free report).
CECO currently has an average brokerage recommendation (ABR) of 1.20 on a scale of 1 to 5 (strong buy to strong sell), calculated based on the actual recommendations (buy, hold, sell, etc.) made by five brokerages companies. An ABR of 1.20 is roughly between strong buy and buy.
Of the five recommendations that stem from the current ABR, four are a strong buy and one is a buy. Strong Buy and Buy represent 80% and 20% of all recommendations, respectively.
Trends in brokerage recommendations for CECO
Check CECO stock price target and forecast here>>>
Although ABR urges you to buy CECO, it may not be prudent to make an investment decision based on this information alone. Several studies have shown limited or no success of brokerage recommendations in guiding investors to select stocks with the best potential for price appreciation.
Are you wondering why? As a result of brokerage firms’ vested 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 retail investors, rarely indicating where a stock’s price might actually be headed. Therefore, the best use of this information may be to validate your own research or an indicator that has proven to be very successful in predicting stock price movements.
Zacks Rank, our proprietary stock rating tool with an impressive externally audited track record, categorizes stocks into five groups ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell) and is an effective indicator of stock price performance in near future. Therefore, using ABR to validate Zacks Rank can be an effective way to make a profitable investment decision.
The Zacks Rank should not be confused with the ABR
Although both Zacks Rank and ABR are displayed on a range of 1-5, they are completely different measures.
The broker’s recommendations are the only basis for calculating the ABR, which is usually shown in decimals (such as 1.28). The Zacks Rank, on the other hand, is a quantitative model designed to harness the power of earnings forecast revisions. It is displayed as whole numbers — 1 to 5.
Analysts employed by brokerage firms have been and continue to be overly optimistic with their recommendations. Because the ratings issued by these analysts are more favorable than their research would warrant due to the self-interest of their employers, they mislead investors far more often than they direct.
In contrast, the Zacks Rank is determined by earnings forecast revisions. And short-term stock price movements are strongly related to trends in earnings estimate revisions, according to empirical research.
In addition, the various Zacks Ranks are applied pro rata to all stocks for which brokerage analysts provide earnings estimates for the current year. In other words, at all times this tool maintains a balance between the five ranks it assigns.
Another key difference between ABR and Zacks Rank is freshness. ABR is not necessarily current when you look at it. But because brokerage analysts are constantly revising their earnings forecasts to account for the company’s changing business trends, and their actions are reflected in the Zacks Rank quickly enough, it is always timely in indicating future price movements.
Should you invest in CECO?
Looking at earnings estimate revisions for CECO, the Zacks Consensus Estimate for the current year has declined 20.2% over the past month to $0.75.
Analysts’ growing pessimism about the company’s earnings outlook, as indicated by the strong consensus among them to revise down EPS estimates, 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 resulted in a Zacks Rank #5 (Strong Sell) for CECO. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Therefore, it may be wise to take the buy-equivalent ABR for CECO with a dose of reserve.
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