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When deciding whether to buy, sell, or hold a stock, investors often rely on analyst recommendations. Media reports about rating changes by these brokerage-firm-employed (or sell-side) analysts often influence a stock’s price, but are they really important?
Before we talk about the reliability of brokerage recommendations and how to use them to your advantage, let’s take a look at what those Wall Street heavyweights think about General Motors Company (GM).
General Motors Company lately has an average brokerage advice (ABR) of 1. 77, on a scale of 1 to five (strong buy to hard sell), calculated on actual advice (buy, hold, sell, etc. ) made through 20 brokerage firms. business. An APR of 1. 77 is close to strong buying and buying.
Of the 20 recommendations that are derived from the existing BIA, 12 are purchases and two are purchases. Strong Buy and Buy account for 60% and 10% of all recommendations, respectively.
Trends in GM Brokerage Recommendations
See the price target and inventory forecast for General Motors Company here >>> ABR suggests buying General Motors Company, but making an investment decision based solely on this information is probably not a good idea. According to several studies, broker recommendations have little or no luck in guiding investors to opt for stocks with the greatest 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 those institutions are not aligned with those of retail investors, providing little insight into the direction of a stock’s long-term value movement. Therefore, it would be more productive to use this data to validate your own research or a tool that has proven to be very effective at predicting inventory value movements.
Zacks Rank, our proprietary inventory scoring tool with an impressive externally audited track record, classifies inventories into five groups, ranging from Zacks No. 1 (Strong Buy) to Zacks No. 5 (Strong Sell), and is an effective indicator of the quality of an inventory. Value. price advancements in the near future. Therefore, ABR to validate the Zacks score can be an effective way to make a successful investment decision.
ABR won’t be with Zacks’ rating
Although the Zacks range and ABR are shown from 1 to 5, they are completely different metrics.
The ABR is calculated solely based on brokerage recommendations and is displayed with decimal put options (example: 1. 28). In contrast, the Zacks Rank is a quantitative style that allows investors to ride the strength of earnings estimate revisions. Shown in total numbers – 1 to 5.
It has been and continues to be the case that analysts hired through brokerage firms are overly positive in their recommendations. Because of the vested interests of their employers, those analysts give more favorable ratings than their studies would allow, thus deceiving investors far more than helping them.
By contrast, the Zacks rating is decided by revisions to earnings estimates. And short-term stock value movements are highly correlated with trends in earnings estimate revisions, according to empirical research.
In addition, Zacks ratings are implemented proportionally to all stocks for which brokerage analysts provide earnings estimates for the current year. In other words, this tool maintains a balance between the five ranges it assigns at all times.
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.
Is GM an investment?
If we look at the revisions to General Motors Company’s earnings estimates, the Zacks consensus estimate for the current year has risen 0. 6% over the previous month to $7. 50.
Analysts’ growing optimism about the company’s earnings outlook, as indicated by the strong agreement among them on revising EPS estimates upwards, may simply be a valid explanation for why inventory will increase in the near term.
The duration of the recent consensus estimate upgrade, along with three other similar points to earnings estimates, have resulted in a Zacks Rank #1 (Strong Buy) for General Motors Company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here >>>>
Therefore, General Motors Company’s purchasing ABR can serve as a useful consultant for investors.
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