Investors often rely on the recommendations of Wall Street analysts when deciding whether to buy, sell, or hold a stock. Media coverage of rating changes by (or sell-side) analysts working for these brokerages often influences stock prices. But do they really matter?
Before we discuss how reliable a broker’s recommendations are and how you can use them to your advantage, let’s take a look at what some of the biggest names on Wall Street think about Dell Technologies (DELL).
Dell Technologies currently has an Average Broken Recommendation (ABR) of 1.38 on a scale of 1 to 5 (Strong Buy vs. Strong Sell). It is calculated based on actual recommendations (buy, hold, sell, etc.) from 20 brokerage firms. . ABR 1.38 is an approximation between strong buy and buy.
Of the 20 recommendations that drive the current ABR, 15 are rated as a “strong buy” and 2 are rated as a “buy.” “Strong Buy” and “Buy” account for 75% and 10% of all recommendations, respectively.
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Although ABR is calling for an acquisition of Dell Technologies, it may not be wise to make an investment decision based solely on this information. Several studies have shown that brokerage firms have limited or no success in encouraging investors to choose stocks with the greatest potential for appreciation.
Wondering why? Because securities companies have a vested interest in the stocks they cover, analysts tend to evaluate them with a strong positive bias. Our research shows that brokerages assign 5 “strong buy” recommendations for every “strong sell” recommendation.
This means that the interests of these institutions are not necessarily aligned with those of retail investors, and can provide little insight into the direction of a stock’s future price movements. Therefore, it is best to use this information to verify your own analysis or tools that have proven to be highly effective at predicting stock price movements.
The Zacks Rank, our proprietary, outside-audited stock rating tool, classifies stocks into five groups ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell). It is an effective indicator for evaluating stock prices. cost performance in the near future. Therefore, examining the Zacks Rank using ABR can be an efficient way to make profitable investment decisions.
Although the Zacks Rank and ABR both range from 1 to 5, they are two entirely different scales.
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