Investors often look to the recommendations made by Wall Street analysts before deciding whether to buy, sell or hold a stock. While media announcements of rating changes by these analysts hired by brokerage firms (or sellers) often affect the stock price, do they really matter?
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 Archer Daniels Midland (ADM).
ADM currently has an average brokerage recommendation (ABR) of 2.00 on a scale of 1 to 5 (strong buy to strong sell), calculated based on the actual recommendations (buy, hold, sell, etc.) made by 12 brokerages companies. An ABR of 2.00 indicates a buy.
Of the 12 recommendations stemming from the current ABR, six are strong buy, representing 50% of all recommendations.
Broker Recommendation Trends for ADM
Check the price target and stock forecast for ADM here>>>
ABR suggests buying ADM, but making an investment decision based on this information alone may not be a good idea. According to several studies, brokerage recommendations have little or no success in directing investors to select stocks with the greatest upside potential.
Are you wondering why? Brokerage firms’ personal interest in a stock they cover often results in a strong positive bias in their analysts’ valuations. 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, giving little insight into the direction of future share price movement. Therefore, it would be best to use this information to validate your own analysis or a tool that has proven to be very effective 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.
ABR should not be confused with Zacks Rank
Despite the fact that Zacks Rank and ABR appear on a scale of 1 to 5, they are two 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.
It was and continues to be the case that analysts employed by brokerage firms are overly optimistic with their recommendations. Due to the vested interests of their employers, these analysts issue more favorable valuations than their research would warrant, misleading investors far more often than helping them.
In contrast, the Zacks Rank is determined by earnings forecast revisions. And short-term stock price movements are strongly correlated with trends in earnings forecast revisions, according to empirical studies.
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 instrument maintains a balance between the five ranks it assigns.
There is also a key difference between ABR and Zacks Rank when it comes to freshness. When you look at the ABR, it may not be up to date. Nevertheless, since brokerage analysts constantly revise their earnings forecasts to reflect changing business trends, and their actions are reflected in the Zacks Rank quickly enough, it is always timely to predict future stock prices.
Is ADM a good investment?
In terms of earnings estimate revisions for ADM, the Zacks Consensus Estimate for the current year was unchanged over the past month at $7.26.
Analysts’ strong 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 size of the recent consensus estimate change, along with three other factors related to earnings estimates, has led to a Zacks Rank #3 (Hold) for ADM. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Therefore, it may be wise to be a little cautious with the buy-equivalent ABR for ADM.
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Archer Daniels Midland Company (ADM) : Free Stock Analysis Report
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