Investors often turn to the recommendations of Wall Street analysts before making a buy, sell or hold decision on a stock. While media reports of rating changes by brokerage firm (or sell-side) analysts often impact a stock’s price, 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 1.63, 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 1.63 approximates between Strong Buy and Buy.
Of the 16 recommendations that make up the current ABR, 10 are Strong Buy and two are Buy. Strong Buy and Buy account for 62.5% 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.
Zacks Rank, our proprietary stock rating tool with an impressive outside-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 a stock’s price . price development in the near future. Therefore, using the ABR to validate the Zacks Rank could be an efficient way to make a profitable investment decision.
ABR should not be confused with Zack’s rank
Despite the fact that Zacks Rank and ABR both appear on a scale of 1 to 5, they are two completely different measures.
Broker recommendations are the sole basis for calculating the ABR, which is usually expressed in decimals (such as 1.28). The Zacks Rank, on the other hand, is a quantitative model designed to harness the power of earnings estimate revisions. It is represented in whole numbers: 1 to 5.
Analysts employed by brokerage firms were and remain overly optimistic in their recommendations. Because these analysts’ ratings are more favorable than their research would support due to the vested interests of their employers, they mislead rather than guide 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 grades of the Zacks Rank are applied proportionately to all stocks for which brokerage analysts provide current-year earnings estimates. In other words, this instrument maintains a balance between the five ranks it awards at all times.
There is also an important difference between the ABR and the Zacks Rank when it comes to freshness. If you look at the ABR, it may not be current. Nevertheless, since stock analysts are constantly revising their earnings estimates to reflect changing business trends, and their actions are reflected in the Zacks Rank quickly enough, it is always timely for predicting future stock prices.
Should you invest in GOLD?
In terms of earnings estimate revisions for Barrick Gold, the Zacks Consensus Estimate for the current year has increased 1.4% 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.