Zacks Equity Research
·4 min read
The recommendations of Wall Street analysts are often relied on by investors when deciding whether to buy, sell, or hold a stock. Media reports about these brokerage-firm-employed (or sell-side) analysts changing their ratings often affect a stock's price. Do they really matter, though?
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 about Alibaba (BABA).
Alibaba currently has an average brokerage recommendation (ABR) of 1.04, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) made by 14 brokerage firms. An ABR of 1.04 approximates between Strong Buy and Buy.
Of the 14 recommendations that derive the current ABR, 13 are Strong Buy and one is Buy. Strong Buy and Buy respectively account for 92.9% and 7.1% of all recommendations.
Brokerage Recommendation Trends for BABA
Check price target & stock forecast for Alibaba here>>>
The ABR suggests buying Alibaba, but making an investment decision solely on the basis of this information might not be a good idea. According to several studies, brokerage recommendations have little to no success guiding investors to choose stocks with the most potential for price appreciation.
Are you wondering why? The vested interest of brokerage firms in a stock they cover often results in a strong positive bias of their analysts in rating it. Our research shows that for every "Strong Sell" recommendation, brokerage firms assign five "Strong Buy" recommendations.
This means that the interests of these institutions are not always aligned with those of retail investors, giving little insight into the direction of a stock's future price movement. It would therefore 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 externally 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 price performance in the near future. Therefore, using the ABR to validate the Zacks Rank could be an efficient way of making a profitable investment decision.
ABR Should Not Be Confused With Zacks Rank
Although both Zacks Rank and ABR are displayed in a range of 1-5, they are different measures altogether.
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 -- 1 to 5.
It has been and continues to be the case that analysts employed by brokerage firms are overly optimistic with their recommendations. Because of their employers' vested interests, these analysts issue more favorable ratings than their research would support, misguiding investors far more often than helping 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 Zacks Rank grades are applied proportionately to all stocks for which brokerage analysts provide current-year earnings estimates. In other words, this tool always maintains a balance among its five ranks.
Another key difference between the ABR and Zacks Rank is freshness. The ABR is not necessarily up-to-date when you look at it. But, since brokerage analysts keep revising their earnings estimates to account for a company's changing business trends, and their actions get reflected in the Zacks Rank quickly enough, it is always timely in indicating future price movements.
Should You Invest in BABA?
Looking at the earnings estimate revisions for Alibaba, the Zacks Consensus Estimate for the current year has remained unchanged over the past month at $7.85.
Analysts' steady views regarding the company's earnings prospects, as indicated by an unchanged consensus estimate, could be a legitimate reason for the stock to perform in line with the broader market in the near term.
The size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #3 (Hold) for Alibaba. You can see the complete list of today's Zacks Rank #1 (Strong Buy) stocks here >>>>
It may therefore be prudent to be a little cautious with the Buy-equivalent ABR for Alibaba.
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Alibaba Group Holding Limited (BABA) : Free Stock Analysis Report
Sure, it looks like we're delving into the complex world of stock analysis, specifically focused on brokerage recommendations, their reliability, and the use of tools like Zacks Rank to make investment decisions. To break it down:
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Brokerage Recommendations: These are suggestions provided by Wall Street analysts working for brokerage firms. They offer ratings on stocks, often ranging from Strong Buy to Strong Sell. In the case of Alibaba (BABA), it's currently receiving predominantly Strong Buy recommendations.
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Average Brokerage Recommendation (ABR): This is a numerical representation of the consensus among brokerage firms regarding a particular stock. For Alibaba, it's around 1.04, leaning heavily towards the Buy side.
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Reliability of Brokerage Recommendations: Studies suggest that these recommendations might not always be reliable due to potential biases. Brokerage analysts might have vested interests that could influence their ratings, often resulting in a more positive bias towards stocks they cover.
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Zacks Rank: Zacks Investment Research has a proprietary tool, the Zacks Rank, which categorizes stocks from #1 (Strong Buy) to #5 (Strong Sell). It relies on earnings estimate revisions to predict stock price movements, which empirical research has shown to be correlated with near-term stock performance.
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Difference Between ABR and Zacks Rank: ABR is solely based on brokerage recommendations, whereas Zacks Rank uses a quantitative model based on earnings estimate revisions. Zacks Rank is considered more timely and less influenced by biases compared to ABR.
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Earnings Estimate Revisions for Alibaba: The Zacks Consensus Estimate for Alibaba has remained unchanged at $7.85 for the current year over the past month, leading to a Zacks Rank #3 (Hold). Steady analyst views on earnings prospects might result in Alibaba performing in line with the broader market in the near term.
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Conclusion: The Buy-equivalent ABR for Alibaba might not necessarily indicate a straightforward investment decision due to the potential biases involved in brokerage recommendations. Utilizing tools like Zacks Rank that rely on earnings estimate revisions might provide a more balanced and timely view for investment decisions.
Ultimately, while brokerage recommendations offer insight, combining this information with tools like Zacks Rank, which rely on objective data rather than analyst opinions, could offer a more comprehensive view for making investment decisions.
