Investors often look to the recommendations of Wall Street analysts before making a buy, sell, or hold decision on a stock. Media reports of rating changes by these brokerage firm (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>>>
The ABR recommends buying Walmart, 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 in guiding investors to select stocks with the greatest potential for appreciation.
Wondering why? Because of 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 issue five “Strong Buy” recommendations for every “Strong Sell” recommendation.
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.
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 near-term price movement. 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 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.
It has always been, and still is, the case that brokerage firm analysts are overly optimistic in their recommendations. Due to the self-interest of their employers, these analysts give more favorable ratings than their research would justify, and in doing so, mislead investors far more often than they help 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 various Zacks Ranks 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 its five ranks.
There is also a key difference between the ABR and the Zacks Rank when it comes to timeliness. When you look at the ABR, it may not be up to date. However, since broker 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 up to date in predicting future stock prices.
Should you invest in WMT?
Looking at earnings estimate revisions for Walmart, the Zacks Consensus Estimate for the current year has moved 0% higher 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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