Before deciding to buy, sell, or hold a stock, investors often rely on recommendations from Wall Street analysts. However, it’s worth examining the reliability and usefulness of these brokerage recommendations.
Let’s take a look at the opinions of Wall Street heavyweights regarding ON Semiconductor Corp. (ON).
ON Semiconductor Corp. currently has an average brokerage recommendation (ABR) of 1.65. This rating is based on recommendations from 26 brokerage firms, ranging from Strong Buy to Strong Sell.
Out of the 26 recommendations, 17 are categorized as Strong Buy and one as Buy. This means that 65.4% of the recommendations are Strong Buy and 3.9% are Buy.
Brokerage Recommendation Trends for ON
While the ABR suggests buying ON Semiconductor Corp., it’s important to note that relying solely on brokerage recommendations may not be wise. Numerous studies have shown that these recommendations have limited success in predicting stock price increases.
One reason for this is the inherent bias of analysts employed by brokerage firms. They often rate stocks with a strong positive bias due to their firms’ vested interests. For instance, brokerage firms issue five “Strong Buy” recommendations for every “Strong Sell” recommendation.
Therefore, it’s best to use this information as a way to validate your own research or as an indicator to supplement your investment decisions.
Zacks Rank, a stock rating tool with a proven track record, categorizes stocks into five groups, from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell). It serves as an effective indicator of a stock’s future price performance. Using the ABR to validate the Zacks Rank can help you make profitable investment decisions.
Distinguishing ABR from Zacks Rank
Although both ABR and Zacks Rank are displayed on a scale of 1-5, they are different measures. ABR is based solely on brokerage recommendations, while Zacks Rank is a quantitative model that incorporates earnings estimate revisions. The Zacks Rank is displayed as whole numbers, while the ABR includes decimals.
Brokerage analysts tend to be overly optimistic in their recommendations due to their employers’ vested interests. In contrast, the Zacks Rank is driven by earnings estimate revisions, which have a strong correlation with short-term stock price movements.
The different Zacks Rank grades are applied proportionately to all stocks with current-year earnings estimates provided by brokerage analysts. This ensures a balanced ranking system.
Another important distinction between ABR and Zacks Rank is freshness. While ABR may not always be up-to-date, Zacks Rank quickly reflects analysts’ revised earnings estimates, making it timely in predicting future stock prices.
Is ON Semiconductor Corp. Worth Investing In?
Looking at the earnings estimate revisions for ON Semiconductor Corp., the Zacks Consensus Estimate for the current year has increased by 1.2% in the past month, reaching $5.25. This indicates growing optimism among analysts regarding the company’s earnings prospects.
The consensus estimate change, along with other factors related to earnings estimates, has resulted in a Zacks Rank #2 (Buy) for ON Semiconductor Corp.
Therefore, the Buy-equivalent ABR for ON Semiconductor Corp. can be a useful guide for investors.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Nasdaq, Inc.