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Investors often turn to recommendations made by Wall Street analysts before making a Buy, Sell, or Hold decision about a stock. While media reports about rating changes by these brokerage-firm employed (or sell-side) analysts often affect a stock's price, do they really matter?
Let's take a look at what these Wall Street heavyweights have to say about Vital Farms (VITL) before we discuss the reliability of brokerage recommendations and how to use them to your advantage.
Vital Farms currently has an average brokerage recommendation (ABR) of 1.06, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) made by nine brokerage firms. An ABR of 1.06 approximates between Strong Buy and Buy.
Of the nine recommendations that derive the current ABR, eight are Strong Buy and one is Buy. Strong Buy and Buy respectively account for 88.9% and 11.1% of all recommendations.
Brokerage Recommendation Trends for VITL
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The ABR suggests buying Vital Farms, 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.
In other words, their interests aren't always aligned with retail investors, rarely indicating where the price of a stock could actually be heading. Therefore, the best use of this information could be validating your own research or an indicator that has proven to be highly successful in predicting a stock's price movement.
With an impressive externally audited track record, our proprietary stock rating tool, the Zacks Rank, which classifies 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. So, validating the Zacks Rank with ABR could go a long way in 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.
The ABR is calculated solely based on brokerage recommendations and is typically displayed with decimals (example: 1.28). In contrast, the Zacks Rank is a quantitative model allowing investors to harness the power of earnings estimate revisions. It is displayed in whole numbers -- 1 to 5.