Prior to making investment decisions, many investors rely on recommendations from Wall Street analysts. However, the question remains: do these recommendations truly matter?
In order to assess the reliability of brokerage recommendations and how to use them to your advantage, let’s first examine what Wall Street analysts have to say about Perion Network (PERI).
Perion Network currently has an average brokerage recommendation (ABR) of 1.67, on a scale of 1 to 5, where 1 is a Strong Buy and 5 is a Strong Sell. This ABR is based on recommendations from six brokerage firms. Three of these recommendations are classified as Strong Buy, and two as Buy. Strong Buy and Buy recommendations collectively make up 83.3% of the total recommendations.
Understanding the Trends in Brokerage Recommendations for PERI
While the ABR suggests buying Perion Network, it is important to note that relying solely on this information may not be a wise decision. Studies have shown that brokerage recommendations have limited success in predicting a stock’s price appreciation.
Why is that? Brokerage analysts have a vested interest in the stocks they cover, leading them to rate stocks more positively than their research might support. In fact, research indicates that brokerage firms assign five “Strong Buy” recommendations for every “Strong Sell” recommendation.
In other words, their recommendations may not always align with the interests of retail investors, making it difficult to determine the actual direction of a stock’s price. Thus, it may be more beneficial to use brokerage recommendations to validate your own research or as an additional indicator alongside other successful predictors of price movement.
Zacks Rank, a proprietary stock rating tool with a track record audited by external sources, 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 near-term price performance. Consequently, utilizing the ABR to validate the Zacks Rank can assist in making profitable investment decisions.
Zacks Rank vs. ABR: Understanding the Key Differences
Despite both appearing on a scale from 1 to 5, the Zacks Rank and ABR are fundamentally different measurements.
The ABR is based solely on brokerage recommendations and is typically displayed as decimals, such as 1.28. On the other hand, the Zacks Rank is a quantitative model that leverages earnings estimate revisions, displayed as whole numbers ranging from 1 to 5.
Brokerage analysts tend to be overly optimistic with their recommendations due to the vested interest of their employers. As a result, their ratings often mislead investors more than guiding them.
In contrast, the Zacks Rank is driven by earnings estimate revisions, which have been found to strongly correlate with near-term stock price movements according to empirical research.
Furthermore, the different Zacks Rank grades are proportionally applied to all stocks for which brokerage analysts provide current-year earnings estimates. This ensures a balanced distribution across the five ranks.
Another differentiating factor between the ABR and Zacks Rank is timeliness. While the ABR may not always be up-to-date, the Zacks Rank incorporates changes in earnings estimates made by brokerage analysts in a timely manner, allowing for predictions of future stock prices.
Is Investing in PERI a Good Choice?
The Zacks Consensus Estimate for Perion Network’s earnings for the current year has remained unchanged at $3.18 over the past month.
Steady views from analysts regarding the company’s earnings prospects, as indicated by an unchanged consensus estimate, may suggest that the stock will perform in line with the broader market in the near term.
The recent stability in the consensus estimate, along with other factors related to earnings estimates, has resulted in a Zacks Rank #3 (Hold) for Perion Network. You can find the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Considering the aforementioned factors, it may be prudent to approach Perion Network’s Buy-equivalent ABR with caution.
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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.