When deciding whether to buy, sell or hold a stock, investors often rely on analyst recommendations. Media reports about rating changes by these brokerage firm (or sell-side) analysts often influence a stock’s price, but are they really important?
Before we discuss the reliability of broker recommendations and how you can use them to your advantage, let’s see what these Wall Street heavyweights think Barrick Gold (GOLD – Free report).
Barrick Gold currently has an average broker recommendation (ABR) of 1.75, 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 1.75 is approximately between Strong Buy and Buy.
Of the sixteen recommendations from which the current ABR arises, nine are Strong Buy and two Buy. Strong Buy and Buy account for 56.3% 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, prompting investors to 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.
Zacks Rank should not be confused with ABR
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 support, misleading rather than helping investors far more often.
The Zacks Rank, on the other hand, is determined by earnings estimate revisions. And according to empirical research, near-term stock price movements are strongly correlated with trends in earnings estimate revisions.
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.
Is gold worth investing in?
In terms of earnings estimate revisions for Barrick Gold, the Zacks Consensus Estimate for the current year is unchanged over the past month at $1.28.
Analysts’ stable view of the company’s earnings prospects, 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 magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #3 (Hold) for Barrick Gold. You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
It may therefore be wise to be a little cautious about the purchase equivalent ABR for Barrick Gold.