When it comes to making investment decisions, many investors rely on recommendations from Wall Street analysts. But how reliable are these recommendations and do they really impact a stock’s price? Let’s take a look at what renowned analysts on Wall Street think about Cadence Design Systems (CDNS).
Cadence currently has an average brokerage recommendation (ABR) of 1.25, which falls between Strong Buy and Buy on a scale of 1 to 5. This ABR is based on recommendations from 12 brokerage firms. Out of these 12 recommendations, 10 are Strong Buy and 1 is Buy, accounting for 83.3% and 8.3% of all recommendations, respectively.
Brokerage Recommendation Trends for CDNS
While the ABR suggests buying Cadence, it’s important to note that relying solely on brokerage recommendations may not be wise. Studies have shown limited success when it comes to using these recommendations to predict stock price increases. One reason for this is the positive bias that analysts employed by brokerage firms tend to have towards the stocks they cover. Our research indicates that for every “Strong Sell” recommendation, brokerage firms assign five “Strong Buy” recommendations. As a result, these recommendations may not always align with the interests of retail investors, providing little insight into a stock’s future price movement. It is best to use this information to validate your own analysis or rely on a proven tool that predicts stock price movements accurately.
At Zacks Investment Research, we offer a proprietary stock rating tool called the Zacks Rank. This tool classifies stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell). The Zacks Rank is a reliable indicator of a stock’s near-term price performance, and combining it with ABR can lead to profitable investment decisions.
ABR Should Not Be Confused With Zacks Rank
The ABR and Zacks Rank, although both portrayed on a scale of 1 to 5, are different measures. The ABR is based solely on broker recommendations, typically displayed as decimals. On the other hand, the Zacks Rank is a quantitative model that utilizes earnings estimate revisions. It is presented as whole numbers between 1 and 5. Brokerage analysts often issue more favorable ratings than their research would support due to their employers’ vested interest in the stocks they cover. This tendency can mislead investors more often than it guides them. In contrast, the Zacks Rank is driven by earnings estimate revisions, which have a strong correlation with short-term stock price movements, as proven by empirical research.
Another distinction between ABR and Zacks Rank is the freshness of the information. ABR may not always be up-to-date, while the Zacks Rank promptly reflects earning estimate revisions by brokerage analysts, providing timely insights into future price movements.
Is CDNS Worth Investing In?
Regarding earnings estimate revisions for Cadence, the Zacks Consensus Estimate for the current year has remained unchanged at $5.09 over the past month. Analysts’ steady views on the company’s earnings prospects, indicated by the unchanged consensus estimate, suggest that the stock may perform in line with the broader market in the near term. The recent change in the consensus estimate, combined with other factors related to earnings estimates, has resulted in a Zacks Rank #3 (Hold) for Cadence.
Considering the Buy-equivalent ABR for Cadence, it may be prudent to exercise caution.
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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.