When deciding whether to buy, sell or hold a stock, investors often rely on analyst recommendations. Media announcements of rating changes by these analysts hired by brokerage firms (or sellers) often affect the stock price, but 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 Super micro computer (SMCI).
Super Micro currently has an average brokerage recommendation (ABR) of 1.67, on a scale of 1 to 5 (strong buy to strong sell), calculated based on the actual recommendations (buy, hold, sell, etc.) made from six brokerage firms. An ABR of 1.67 is roughly between strong buy and buy.
Of the six recommendations that stem from the current ABR, four are strong buys, representing 66.7% of all recommendations.
Trends in broker recommendations for SMCI
Check Super Micro stock price target and forecast here>>>
ABR suggests buying Super Micro, 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.
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.
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.
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 correlated with trends in earnings forecast revisions, according to empirical studies.
In addition, the various Zacks Rank classes are applied proportionately to all stocks for which brokerage analysts provide earnings estimates for the current year. In other words, this instrument always maintains a balance between its five ranks.
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 it worth investing in SMCI?
In terms of earnings forecast revisions for Super Micro, the Zacks Consensus Estimate for the current year was unchanged over the past month at $15.54.
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 resulted in a Zacks Rank #3 (Hold) for Super Micro. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
So it might be wise to be a little cautious with the purchase equivalent ABR for the Super Micro.
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Super Micro Computer, Inc. (SMCI): Free Stock Analysis Report
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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.