Wall Street analysts, the so-called wizards of the stock market, often swaying investors with their enchanted ratings. But is their magic really all it’s cracked up to be? Let’s dive into the mystical realm of brokerage recommendations and unravel the truth about whether they hold the key to fortune, with a focus on Toll Brothers (TOL).
At present, Toll Brothers has an average brokerage recommendation (ABR) of 2.00, interpreted as a Buy. The calculation is based on the actual recommendations (Buy, Hold, Sell, etc.) made by 14 brokerage firms. According to the 14 recommendations, eight are Strong Buy and two are Buy, accounting for 57.1% and 14.3% of all recommendations, respectively.
Brokerage Recommendation Trends for TOL
Despite the flashy Buy label, basing investment decisions solely on this flimsy information might just lead you down the wrong rabbit hole. Research has revealed that brokerage recommendations have limited success in guiding investors to stocks with the best potential for price increase.
Why, you ask? Well, it turns out analysts at brokerage firms are under a mystical spell, concocting their ratings with an overwhelmingly positive bias due to their vested interest in the stocks they cover. Our own research shows that for every “Strong Sell” recommendation, these analysts sprinkle five “Strong Buy” recommendations, their supposed sage advice often leading astray more than guiding.
So, while the ABR may shine brightly as a Buy, it’s best to take it with a pinch of salt and use it to complement your own analysis or a tool proven for accurate stock price predictions.
Fortunately, we’ve got just the magical tool – our proprietary stock rating, the Zacks Rank, as reliable as a unicorn in the mist, categorizes stocks into five groups from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), serving as a true guide to a stock’s near-term price performance. Crosschecking the Zacks Rank with ABR could just be the spell you need to make a wise investment decision.
ABR Should Not Be Confused With Zacks Rank
Although both ABR and Zacks Rank flaunt the same scale from 1 to 5, they are as different as potions and spells.
ABR is simply based on brokerage recommendations and usually displayed with decimals, while the Zacks Rank is a powerful model fueled by earnings estimate revisions and displayed in whole numbers, 1 to 5.
While the analysts’ ratings are laced with enchantments, the Zacks Rank rides on the wings of earnings estimate revisions and has been proven to be strongly linked to stock price movements, a real pot of gold at the end of the rainbow.
Moreover, the Zacks Rank treats all stocks with fairness, applying its different grades proportionately to those for which analysts provide current-year earnings estimates. But the real magic is in its timeliness – while the ABR may be as stale as day-old bread, the Zacks Rank, just like a well-brewed potion, is always timely in predicting stock prices as it quickly reflects the effects of analysts’ earnings estimate revisions on stock movements.
Should You Invest in TOL?
In terms of earnings estimate revisions for Toll Brothers, the Zacks Consensus Estimate for the current year has dipped by 0.1% over the past month to $11.91.
Analysts’ gloomy outlook on the company’s earnings prospects, evident through a unanimous downgrade in EPS estimates, has sentenced Toll Brothers to a Zacks Rank #4 (Sell). You can peruse the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Therefore, it might be wise to take that gleaming Buy-equivalent ABR for Toll Brothers with a dash of skepticism.
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Views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.