Investors often rely on the recommendations of Wall Street analysts when deciding whether to buy, sell or hold a stock. Media reports about changes in the ratings of these brokerage firm-based (or sell-side) analysts often affect the stock price. But do they really matter?
Let’s take a look at what these Wall Street heavyweights have to say about Walmart (WMT) before we discuss the reliability of broker recommendations and how to use them to your advantage.
Walmart currently has an average broker recommendation (ABR) of 1.29 on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) of 33 brokerage firms. An ABR of 1.29 is roughly between Strong Buy and Buy.
Of the 33 recommendations that make up the current ABR, 26 are Strong Buy and four are Buy. Strong Buy and Buy account for 78.8% and 12.1% of all recommendations, respectively.
Brokerage Recommendation Trends for WMT
Check Walmart price target and stock forecast here>>>
Although the ABR recommends buying Walmart stock, it may not be wise to make an investment decision based solely on this information. Several studies have shown that broker recommendations provide little or no help to investors in selecting stocks with the best price appreciation potential.
Wondering why? Brokerage firms’ vested interest in a stock they cover often leads their analysts to give that stock a strong positive rating. Our research shows that for every “Strong Sell” recommendation, brokerage firms give five “Strong Buy” recommendations.
This means that the interests of these institutions do not always align with those of retail investors and therefore provide little insight into the direction of a stock’s future price movement. Therefore, it would be best to use this information to validate your own analysis or a tool that has proven to be highly effective at predicting stock price movements.
With an impressive, outside-audited track record, our proprietary stock evaluation tool, the Zacks Rank, which categorizes 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 near-term price performance. Validating the Zacks Rank with ABR can therefore go a long way in making a profitable investment decision.
ABR should not be confused with the Zacks Rank
Although both the Zacks Rank and ABR are displayed in a range of 1-5, they are completely different metrics.
The ABR is calculated based solely on broker recommendations and is typically displayed with decimals (example: 1.28). In contrast, the Zacks Rank is a quantitative model that allows investors to harness the power of earnings estimate revisions. It is displayed in whole numbers – 1 through 5.
The analysts employed by brokerage firms were and are overly optimistic in their recommendations. Because the ratings given by these analysts are more favorable than their research would justify, due to the self-interest of their employers, they mislead investors far more often than they guide them.
In contrast, the Zacks Rank is driven by earnings estimate revisions, and near-term stock price movements are strongly correlated with trends in earnings estimate revisions, according to empirical research.
In addition, the different levels of the Zacks Rank are proportionally applied to all stocks for which brokerage analysts provide earnings estimates for the current year. In other words, this tool always maintains a balance among the five ranks it assigns.
Another key difference between the ABR and the Zacks Rank is timeliness. The ABR is not necessarily up-to-date when you look at it. However, since broker analysts are constantly revising their earnings estimates to reflect a company’s changing business trends and their actions are reflected in the Zacks Rank quickly enough, it is always up-to-date when it comes to indicating future price movements.
Is WMT a good investment?
In terms of earnings estimate revisions for Walmart, the Zacks Consensus Estimate for the current year has increased 0.2% to $2.43 within the past month.
Growing optimism among analysts regarding the company’s earnings prospects, as reflected in the strong consensus among analysts in increasing their earnings estimates, could be a legitimate reason for a rapid rise in the stock price in the near future.
The magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, have led Walmart to earn a Zacks Rank of #2 (Buy). See the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Therefore, the purchase equivalent ABR for Walmart can serve as a useful guide for investors.
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Walmart Inc. (WMT): Free Stock Analysis Report
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