When making investment decisions, many investors rely on recommendations from Wall Street analysts. These analysts, who are employed by brokerage firms, often have an influence on a stock’s price through media reports about rating changes. However, is this information really important?
Before discussing the reliability and use of brokerage recommendations, let’s take a look at what these analysts have to say about Vertiv Holdings Co. (VRT).
Vertiv Holdings Co. currently has an average brokerage recommendation (ABR) of 1.22, on a scale of 1 to 5, with 1 indicating a strong buy and 5 indicating a strong sell. This ABR is based on the recommendations made by nine brokerage firms. Of these recommendations, eight are strong buy, making up 88.9% of all recommendations.
Brokerage Recommendation Trends for VRT
While the ABR suggests buying Vertiv Holdings Co., it’s not advisable to solely rely on this information when making investment decisions. Studies have shown that brokerage recommendations have limited success in predicting stocks’ price increase potential.
Brokerage analysts tend to rate stocks they cover with a strong positive bias due to their vested interest in those stocks. Research indicates that brokerage firms give five “strong buy” recommendations for every “strong sell” recommendation. This misalignment of interest may not provide valuable insights into the future price movement of a stock. It’s best to use this information to validate your own analysis or rely on a proven tool for predicting stock price movements.
Using Zacks Rank to Make a Profitable Investment Decision
The Zacks Rank is a proprietary stock rating tool with a strong audited track record. It categorizes stocks into five groups ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell) to indicate a stock’s price performance in the near future. Validating the ABR with the Zacks Rank can be an efficient way of making profitable investment decisions.
It’s important to note that the ABR and Zacks Rank are different measures. The ABR is based solely on broker recommendations and is displayed in decimals, while the Zacks Rank is a quantitative model based on earnings estimate revisions and is displayed in whole numbers.
Brokerage analysts are known for their overly optimistic recommendations, often reflecting their employers’ interests. On the other hand, the Zacks Rank focuses on earnings estimate revisions, which have shown a strong correlation with stock price movements.
The different Zacks Rank grades are proportionately applied to all stocks for which brokerage analysts provide current-year earnings estimates, maintaining a balance among the ranks.
The ABR may not always be up-to-date, but the Zacks Rank quickly reflects analysts’ revisions, making it timely in predicting future stock prices.
Is Vertiv Holdings Co. a Good Investment?
In terms of earnings estimate revisions, the Zacks Consensus Estimate for Vertiv Holdings Co. for the current year has increased by 0.8% over the past month to $1.59. Analysts’ growing optimism about the company’s earnings prospects, indicated by strong agreement in revising EPS estimates higher, could potentially lead to a stock price increase in the near term.
Based on the recent change in the consensus estimate and other factors related to earnings estimates, Vertiv Holdings Co. has a Zacks Rank #1 (Strong Buy).
Therefore, the ABR suggesting a buy for Vertiv Holdings Co. can serve as a useful guide for investors.
Zacks Investment Research