Investors often rely on the recommendations of Wall Street analysts when deciding whether to buy, sell, or hold a stock. Media reports about these analysts employed by a brokerage firm (or on the sell side) changing their ratings often affect the price of a stock. But do they really matter?
Let’s take a look at what these Wall Street heavyweights have to say Barrick Gold (GOLD – Free Report) before we discuss the reliability of broker recommendations and how you can use them to your advantage.
Barrick Gold currently has an average broker recommendation (ABR) of 1.50, on a scale of 1 to 5 (strong buy to strong sell), calculated based on the actual recommendations (buy, hold, sell, etc.) of 16 brokerage firms . . An ABR of 1.50 is approximately between Strong Buy and Buy.
Of the 16 recommendations that make up the current ABR, 11 are Strong Buy and two are Buy. Strong Buy and Buy account for 68.8% and 12.5% of all recommendations respectively.
Trends in broker recommendations for GOLD
View the price target and stock forecast for Barrick Gold here>>>
The ABR suggests buying Barrick Gold, but making an investment decision based solely on this information may not be a good idea. According to several studies, broker recommendations have little to no success and help investors choose stocks with the most potential for price appreciation.
Are you wondering why? Due to 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 do not always align with those of private investors, which rarely indicates where a share’s price might actually go. Therefore, the best use of this information could be to validate your own research or an indicator that has proven very successful in predicting a stock’s price movement.
With an impressive outside-audited track record, our proprietary stock rating tool, the Zacks Rank, which classifies stocks into five groups ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), is a reliable indicator of a stock’s price movement. share in the short term. So, validating the Zacks Rank with ABR can go a long way toward making a profitable investment decision.
ABR should not be confused with Zack’s rank
Although both Zacks Rank and ABR are listed in a range of 1-5, they are completely different measures.
The ABR is calculated solely based on broker recommendations and is usually represented by decimals (for example: 1.28). The Zacks Rank, on the other hand, is a quantitative model that allows investors to harness the power of earnings estimate revisions. It is represented in whole numbers: 1 to 5.
It remains the case that analysts at brokerage firms are too optimistic about their recommendations. Due to the vested interests of their employers, these analysts issue more favorable ratings than their research would show, misleading rather than helping investors far more often.
On the other hand, earnings estimate revisions are the core of the Zacks Rank. And empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
Additionally, the various Zacks Rank grades 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 the five ranks.
Another key difference between the ABR and Zacks Rank is freshness. If you look at it, the ABR is not necessarily up to date. But since stock analysts continue to revise their earnings estimates to reflect a company’s changing business trends, and their actions are reflected in the Zacks Rank soon enough, it’s always timely to signal future price movement.
Is gold worth investing in?
Looking at earnings estimate revisions for Barrick Gold, the Zacks Consensus Estimate for the current year has risen 2.6% over the past month to $1.29.
Analysts’ increasing optimism about the company’s earnings prospects, as evidenced by the strong agreement among them on upgrading earnings per share estimates, could be a legitimate reason for the stock to rise in the near term.
The magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, has resulted in a Zacks Rank of #2 (Buy) for Barrick Gold. You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Therefore, the Buy equivalent ABR for Barrick Gold can serve as a useful guide for investors.