Realizing whether to buy, sell, or hold a stock often hinges on analyst recommendations. These sell-side analysts’ rating changes, widely covered in the media, can sway a stock’s price. But how much weight should investors give them?
Before delving into the reliability of brokerage recommendations and how to leverage them, let’s take a peek into what these Wall Street authorities envision for Alibaba (BABA).
Analysts’ Sentiments Towards Alibaba (BABA)
Currently, Alibaba boasts an average brokerage recommendation (ABR) of 1.35 on a scale of 1 to 5. This scale ranges from Strong Buy to Strong Sell and is aggregated from the ratings (Buy, Hold, Sell, etc.) of 17 brokerage firms. An ABR of 1.35 aligns between Strong Buy and Buy.
Among the 17 recommendations contributing to the current ABR, 14 signal Strong Buy, accounting for a significant 82.4% of all recommendations.
Assessing Brokerage Recommendation Trends for BABA
While the ABR advocates for purchasing Alibaba, making a solely decision based on this information might not be prudent. Numerous studies have indicated the limited success rate of brokerage recommendations in guiding investors towards stocks with the highest price appreciation potential.
So why the skepticism? Brokerage firms’ vested interest in the stocks they cover often results in a pronounced positive bias from their analysts in rating them. Our research highlights a staggering imbalance – for every “Strong Sell” recommendation, five “Strong Buy” recommendations are assigned by brokerage firms.
Hence, their interests seldom coincide with those of retail investors, offering little insight into where a stock’s price might head. Therefore, using this information to validate your own research or in conjunction with a successful price movement predictor might be ideal.
Utilizing Zacks Rank for Informed Investment
With an externally audited track record, Zacks Rank offers a reliable assessment of a stock’s near-term price performance. Categorizing stocks into five groups from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), it provides investors with a potent tool for decision-making.
Distinction Between Zacks Rank and ABR
Despite sharing a 1 to 5 scale, Zacks Rank and ABR are two distinct metrics. ABR stems solely from brokerage recommendations and is usually displayed with decimals (e.g., 1.28). On the other hand, Zacks Rank utilizes a quantitative model that leverages earnings estimate revisions, represented in whole numbers from 1 to 5.
Unlike brokerage analysts’ overly optimistic ratings, Zacks Rank hinges on earnings estimate revisions. Studies demonstrate a strong correlation between short-term stock price movements and trends in earnings estimate revisions.
Furthermore, while ABR may not offer the most current view, Zacks Rank promptly reflects revisions made by brokerage analysts to align with a company’s evolving business dynamics. This timeliness ensures its efficacy in signaling future price trends.
Is BABA a sound investment?
Regarding earnings estimate revisions for Alibaba, the Zacks Consensus Estimate for the current year saw a modest 0.1% decline over the past month to $8.20.
Analysts’ growing pessimism towards the company’s earnings outlook, evidenced by a unanimous downward revision in EPS estimates, could foreshadow a near-term decline in the stock.
This change, coupled with other factors associated with earnings estimates, resulted in a Zacks Rank #4 (Sell) for Alibaba. You can view the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Thus, it might be prudent to take the Buy-equivalent ABR for Alibaba with a grain of skepticism.
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