When deciding whether to buy, sell, or hold a stock, investors often rely on analyst recommendations. Media reports about rating changes by these brokerage-firm-employed (or sell-side) analysts often influence a stock’s price, but are they worth the hype?
Before we dive into the reliability of brokerage recommendations and how to make informed decisions, let’s delve into what Wall Street heavyweights think about Zscaler (ZS).
Zscaler currently stands at an average brokerage recommendation (ABR) of 1.46, on a scale of 1 to 5 (Strong Buy to Strong Sell), aggregated from the actual recommendations made by 37 brokerage firms. An ABR of 1.46 approximates a stance between Strong Buy and Buy.
Out of the 37 recommendations contributing to the current ABR, 28 are Strong Buy and one is Buy. Together, Strong Buy and Buy make up 75.7% and 2.7% of all recommendations, respectively.
Brokerage Recommendation Trends for ZS
Check price target & stock forecast for Zscaler here>>>
While the ABR suggests buying Zscaler, it’s crucial not to base investment decisions solely on this information. Multiple studies have indicated limited to no success of brokerage recommendations in identifying stocks with the best price increase potential.
Why, you ask? The vested interest of brokerage firms in the stocks they cover leads their analysts to rate them with a strong positive bias. According to our research, brokerage firms assign five “Strong Buy” recommendations for every “Strong Sell” recommendation.
This misalignment of interests between these institutions and retail investors offers little insight into a stock’s future price movement. Therefore, it’s best to use this information to validate your own analysis or a tool that has a proven track record in predicting stock price movements.
Zacks Rank, our proprietary stock rating tool with an impressive externally audited track record, categorizes stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), and is an effective indicator of a stock’s price performance in the near future. Therefore, using the ABR to validate the Zacks Rank could be an efficient way of making a profitable investment decision.
ABR Should Not Be Confused With Zacks Rank
Although both Zacks Rank and ABR are displayed within a range of 1-5, they are entirely different measures.
The ABR is calculated solely based on brokerage recommendations and typically displayed with decimals (e.g., 1.28). In contrast, the Zacks Rank is a quantitative model enabling investors to leverage the power of earnings estimate revisions, displayed in whole numbers from 1 to 5.
It remains a fact that analysts employed by brokerage firms are often excessively optimistic with their recommendations due to their employers’ vested interests, issuing more favorable ratings than their research would support, thus often misleading investors rather than aiding them.
Conversely, the Zacks Rank is driven by earnings estimate revisions, and empirical research shows a strong correlation between near-term stock price movements and trends in earnings estimate revisions.
Moreover, the different Zacks Rank grades are evenly allocated across all stocks for which brokerage analysts provide current-year earnings estimates, ensuring a balanced distribution.
There is a crucial disparity between the ABR and Zacks Rank in terms of timeliness. The ABR may not always be up-to-date, while the Zacks Rank swiftly reflects brokerage analysts’ constant revisions of their earnings estimates to mirror changing business trends. As a result, it is consistently timely in predicting future stock prices.
Is ZS a Good Investment?
Looking at the earnings estimate revisions for Zscaler, the Zacks Consensus Estimate for the current year has seen a 0.1% increase over the past month, reaching $2.47.
Analysts’ growing optimism about the company’s earnings prospects, as evidenced by strong consensus in revising EPS estimates higher, could be a legitimate catalyst for the stock’s surge in the near term.
Based on the magnitude of the recent change in the consensus estimate and three other earnings estimate-related factors, Zscaler has been awarded a Zacks Rank #2 (Buy). You can view the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Consequently, the Buy-equivalent ABR for Zscaler may indeed serve as a valuable guide for investors.
Just Released: Zacks Top 10 Stocks for 2024
Hurry – you can still get in early on our 10 top tickers for 2024. Hand-picked by Zacks Director of Research, Sheraz Mian, this portfolio has been stunningly and consistently successful. From inception in 2012 through November, 2023, the Zacks Top 10 Stocks gained +974.1%, nearly TRIPLING the S&P 500’s +340.1%. Sheraz has combed through 4,400 companies covered by the Zacks Rank and handpicked the best 10 to buy and hold in 2024. You can still be among the first to see these just-released stocks with enormous potential. See New Top 10 Stocks >>
Zscaler, Inc. (ZS) : Free Stock Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
