Investors often look to the recommendations made by Wall Street analysts before making a decision 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?
Let’s take a look at what these Wall Street heavyweights have to say International sea lanes (INSW – Free Report) before discussing the reliability of broker recommendations and how to use them to your advantage.
International Seaways currently has an average brokerage recommendation (ABR) of 1.00 on a scale of 1 to 5 (strong buy to strong sell), calculated based on the actual recommendations (buy, hold, sell, etc.) made by six brokerage firms. An ABR of 1.00 indicates a strong buy.
Of the six recommendations that stem from the current ABR, six are strong buys, representing 100% of all recommendations.
Check the price target and forecast for International Seaways stock here>>>
Although ABR calls for buying International Seaways, 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? 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.
The Zacks Rank should not be confused with the ABR
Despite the fact that Zacks Rank and ABR appear on a scale of 1 to 5, they are two completely different measures.
ABR is calculated solely based on broker recommendations and is usually shown in decimals (example: 1.28). In contrast, the Zacks Rank is a quantitative model that allows investors to harness the strength of earnings estimate 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 highly correlated with trends in earnings forecast 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 instrument 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 constantly revise 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 to indicate future price movements.
Is INSW a good investment?
Looking at earnings forecast revisions for International Seaways, the Zacks Consensus Estimate for the current year has increased 3.1% over the past month to $9.36.
Analysts’ growing optimism about the company’s earnings outlook, as indicated by strong consensus among them to revise higher EPS estimates, could be a legitimate reason for the stock to surge 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 #1 (Strong Buy) for International Seaways. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Therefore, the buy-equivalent ABR for International Seaways can serve as a useful guide for investors.
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