When pondering the decision of whether to add, divest, or retain a stock, investors habitually turn to the insights of analyst recommendations. Reports in the media about changes in ratings by these brokerage-firm-affiliated (or sell-side) analysts typically exert influence on a stock’s price. However, the pivotal question is: are these endorsements truly consequential?
Before delving into the reliability of brokerage recommendations and how to capitalize on them, let’s delve into the sentiments of the Wall Street stalwarts regarding Copa Holdings (CPA).
Copa Holdings currently boasts an average brokerage recommendation (ABR) of 1.00, graded on a scale from 1 to 5 (with Strong Buy to Strong Sell constituting the two ends of the spectrum). This rating is derived from the actual recommendations (Buy, Hold, Sell, etc.) of 10 brokerage firms. An ABR of 1.00 conveys a Strong Buy sentiment.
Of the 10 recommendations contributing to the current ABR, all 10 stand as Strong Buy, signifying a unanimous 100% advocacy for the stock.
Brokerage View Trends for Copa Holdings
The ABR espouses a bullish stance on Copa Holdings, but it’s imperative to refrain from sole reliance on this information for investment decisions. According to multiple studies, brokerage recommendations have exhibited minimal to no efficacy in guiding investors toward stocks with the utmost potential for price appreciation.
Why is that, you wonder? It’s exacerbated by the inherent bias of brokerage firms towards the stocks they cover, leading their analysts to endow them with a markedly positive tilt. Our research signifies that, for every “Strong Sell” recommendation, brokerage firms endorse five “Strong Buy” ratings.
Put simply, their allegiances do not consistently align with those of retail investors, scarcely painting a precise picture of a stock’s potential future price trajectory. Thus, the most judicious use of this information would be to corroborate your own research or employ an indicator that has demonstrated marked success in prognosticating a stock’s price movements.
Zacks Rank, our proprietary stock rating tool, with an externally audited commendable track record, categorizes stocks into five groupings, spanning from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell). It stands as a potent indicator of a stock’s imminent price performance. Therefore, employing the ABR to validate the Zacks Rank could yield a sound basis for investment decisions.
Discerning Zacks Rank From ABR
Despite sharing the 1-5 range, Zacks Rank and ABR are inherently distinct metrics.
ABR is computed solely based on brokerage endorsements and is conventionally presented with decimals (e.g., 1.28). By contrast, Zacks Rank is a quantitative model enabling investors to harness the power of earnings estimate revisions, denoted by whole numbers from 1 to 5.
The analysts at brokerage firms have historically been unduly sanguine in their endorsements. Given that their ratings are more sanguine than their analyses would bear out, due to the vested interests of their employers, they mislead investors far more frequently than they provide guidance.
Conversely, Zacks Rank hinges on earnings estimate revisions. Furthermore, empirical research upholds a robust correlation between near-term stock price movements and trends in earnings estimate revisions.
Furthermore, the different grades within Zacks Rank are assigned proportionally to all stocks for which brokerage analysts furnish current-year earnings estimates. In essence, this tool consistently maintains equilibrium across its five ranks.
Another pivotal point of differentiation between ABR and Zacks Rank pertains to timeliness. The ABR may not consistently reflect the most current sentiments. Conversely, since brokerage analysts continually revise their earnings estimates to mirror evolving business trends–and these actions promptly manifest in the Zacks Rank–it perennially furnishes timely insights into predicting prospective stock prices.
Is Investing in Copa Holdings Viable?
A perusal of the earnings estimate revisions for Copa Holdings reveals that the Zacks Consensus Estimate for the present year has remained unaltered over the past month, holding steady at $15.26.
The steadfast viewpoints among analysts regarding the company’s earnings prospects, evidenced by an unchanging consensus estimate, could furnish a valid rationale for the stock’s performance to parallel that of the broader market in the near term.
The magnitude of the recent consensus estimate stability, coupled with three other factors pertaining to earnings estimates, has bestowed a Zacks Rank #3 (Hold) upon Copa Holdings. You can peruse the comprehensive list of Zacks Rank #1 (Strong Buy) stocks today here >>>>
Thus, exercising a modicum of prudence vis-a-vis the ABR equivalent to a Buy rating for Copa Holdings may be judicious.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.