Investors often rely on the advice of Wall Street analysts when making decisions pertaining to the trading of stocks. The influence of media reports on stock prices based on the ratings of these sell-side analysts cannot be underestimated. But how much weight should we give to their recommendations?
Before we delve into the reliability of brokerage recommendations and their strategic value, let’s explore the insights provided by Wall Street heavyweights on Advanced Micro Devices (AMD).
The Landscape for Advanced Micro
At present, Advanced Micro holds an average brokerage recommendation (ABR) of 1.36, falling between Strong Buy and Buy on the 1 to 5 scale. This figure is the result of actual recommendations (Buy, Hold, Sell, etc.) from 29 brokerage firms, with 23 Strong Buy and one Buy. Consequently, Strong Buy and Buy recommendations account for 79.3% and 3.5% respectively.
The Reliability of Brokerage Recommendations
While the ABR suggests a buy for Advanced Micro, relying solely on this information for investment decisions may not be prudent. Studies have indicated limited success of brokerage recommendations in identifying stocks with substantial price increase potential.
Why is this the case? Brokerage firms’ vested interests in the stocks they cover lead to a strong positive bias in their analysts’ ratings. Furthermore, for every “Strong Sell” recommendation, brokerage firms assign five “Strong Buy” recommendations, thus highlighting a misalignment of interest with retail investors.
Therefore, it’s advisable to use this data to validate personal analysis or a proven tool for predicting stock price movements.
The Role of Zacks Rank
Our internally audited Zacks Rank, which categorizes stocks from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), is a reliable indicator of near-term price performance. Hence, corroborating the Zacks Rank with ABR can significantly aid in making informed investment decisions.
ABR vs. Zacks Rank
Although both ABR and Zacks Rank are rated on a 1-5 scale, they are distinct metrics. ABR is based solely on broker recommendations, often displayed in decimals, while Zacks Rank relies on a quantitative model centered around earnings estimate revisions, represented in whole numbers from 1 to 5.
Brokerage analysts’ consistently optimistic recommendations are at odds with their research, as they tend to overrate stocks due to their employers’ vested interests. In contrast, the Zacks Rank reflects earnings estimate revisions, which are strongly linked to short-term stock price movements based on empirical research.
Is AMD a Wise Investment?
In terms of earnings estimate revisions for Advanced Micro, the Zacks Consensus Estimate for the current year has remained steady at $2.65 over the past month. Analysts’ consistent views on the company’s earnings prospects, leading to an unchanged consensus estimate, could justify the stock’s near-term performance in line with the broader market.
Despite this, a Zacks Rank #3 (Hold) has been assigned to Advanced Micro due to the recent consensus estimate stability and other factors related to earnings estimates.
Given the slight caution warranted by the Buy-equivalent ABR for Advanced Micro, it’s clear that investors should exercise their own judgment and consider accompanying factors like the Zacks Rank before making investment decisions.
Zacks’ Top Pick
With numerous options at hand, Zacks experts who have chosen their favored stocks to potentially skyrocket by +100% or more are worth considering. The selected company boasts unrelenting demand, soaring 2022 earnings estimates, and $1.5 billion for share repurchasing, making it a compelling investment prospect for retail investors.
The potential of this company could rival or surpass other recent Zacks’ Stocks Set to Double, such as Boston Beer Company and NVIDIA, both of which have experienced significant growth.
The opinions expressed herein are solely those of the author and do not necessarily reflect those of Nasdaq, Inc.