Investors often rely on analyst recommendations when deciding whether to buy, sell or hold a stock. Media reports of rating changes by these brokerage firm-based (or sell-side) analysts often influence a stock’s price, but do they really matter?
Before we discuss the reliability of broker recommendations and how to use them to your advantage, let’s see what these Wall Street heavyweights have to say about Zscaler (ZS).
Zscaler currently has an average broker recommendation (ABR) of 1.55 on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) of 38 brokerage firms. An ABR of 1.55 is roughly between Strong Buy and Buy.
Of the 38 recommendations that derive the current ABR, 27 are Strong Buy and one is Buy. Strong Buy and Buy account for 71.1% and 2.6% of all recommendations, respectively.
Brokerage recommendation trends for ZS
Check Zscaler price target and stock forecast here>>>
Although the ABR recommends buying Zscaler, it may not be wise to make an investment decision based solely on this information. Several studies have shown that broker recommendations do little to no good in helping investors select stocks with the best upside 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.
In other words, their interests do not always align with those of retail investors and rarely provide any indication of where a stock’s price might actually go. Therefore, this information might be best used to validate your own research or an indicator that has proven extremely successful in predicting a stock’s price movement.
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.
Zacks Rank should not be confused with ABR
Although Zacks Rank and ABR both appear on a scale of 1 to 5, they are two 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 provided 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 provide guidance.
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.
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 it worth investing in ZS?
Looking at earnings estimate revisions for Zscaler, the Zacks Consensus Estimate for the current year remained unchanged at $3.01 within the past month.
Analysts’ stable assessments of the company’s earnings prospects, reflected in an unchanged consensus estimate, could be a legitimate reason for the stock to perform in line with the overall market in the near future.
The magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, have led to a Zacks Rank #3 (Hold) for Zscaler. The complete list of today’s Zacks Rank #1 (Strong Buy) stocks can be found here >>>>
Therefore, it may be wise to be a little cautious when purchasing equivalent ABR for Zscaler.
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