When deciding whether to buy, sell or hold a stock, investors often rely on analyst recommendations. Media reports of rating changes made by these analysts employed by brokerage (or sell-side) firms often influence a stock’s price, but do they really matter?
Before we discuss the reliability of brokerage recommendations and how to use them to your advantage, let’s see what these Wall Street heavyweights think. Barrick Gold (GOLD).
Barrick Gold currently has an average brokerage recommendation (ABR) of 1.93, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on actual recommendations (Buy, Hold, Sell, etc.). ) made by 15 brokerage companies. . An ABR of 1.93 is approximately between Strong Buy and Buy.
Of the 15 recommendations that derive from the current ABR, seven are strong buys and two are buys. Strong Buy and Buy represent 46.7% and 13.3% of all recommendations, respectively.
Brokerage Recommendation Trends for GOLD
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 or no success in guiding investors in choosing stocks with the greatest potential for price appreciation.
You wonder 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, brokerages assign five “Strong Buy” recommendations for every “Strong Sell” recommendation.
This means that the interests of these institutions are not always aligned with those of retail investors, providing little insight into the direction of a stock’s future price movement. So it would be better to use this information to validate your own analysis or a tool that has proven to be very effective in predicting stock price movements.
With an impressive externally audited track record, our proprietary stock rating tool, the Zacks Rank, which ranks stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), is an reliable indicator of a stock’s short-term price performance. Thus, validating the Zacks Rank with ABR could go a long way in making a profitable investment decision.
The Zacks Rank should not be confused with ABR
Although both Zacks Rank and ABR appear on a scale of 1 to 5, they are two completely different metrics.
Broker recommendations are the sole basis for calculating the ABR, which is typically displayed 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 displayed in whole numbers – from 1 to 5.
Analysts employed by brokerage firms have been and continue to be overly optimistic in their recommendations. Because the ratings issued by these analysts are more favorable than their research would allow due to the vested interests of their employers, they mislead investors far more often than they guided them.
On the other hand, earnings estimate revisions are at the heart of the Zacks Rank. And empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
Additionally, different Zacks Rank grades are applied proportionately to all stocks for which the brokerage’s analysts provide earnings estimates for the current year. In other words, this tool maintains a balance between the five ranks it assigns at all times.
Another key difference between the ABR and the Zacks Rank is freshness. The ABR is not necessarily up to date when consulted. But, since brokerage analysts continue to revise their earnings estimates to reflect changing business trends of a company and their stocks are reflected in the Zacks Rank fairly quickly, it is always timely to indicate future price movements.
Is GOLD worth investing in?
In terms of Barrick Gold’s earnings estimate revisions, the Zacks Consensus Estimate for the current year remained unchanged over the past month at $0.95.
Analysts’ strong views regarding the company’s earnings outlook, as indicated by an unchanged consensus estimate, could be a legitimate reason for the stock to move in line with the broader market in the near term.
The magnitude of the recent change in the consensus estimate, along with three other factors related to earnings estimates, have 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 >>>>
So it may be prudent to be a little cautious with the buy-equivalent ABR for Barrick Gold.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.