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 affect a stock’s price, but do they really matter?

Before we discuss the reliability of brokerage recommendations and how to use them to your advantage, let’s see what these Wall Street heavyweights think. fedex (FDX).

FedEx currently has an average brokerage recommendation (ABR) of 1.91, on a scale of 1 to 5 (strong buy to strong sell), calculated based on actual recommendations (buy, hold, sell, etc.) made by 23 brokerage firms. An ABR between Strong Buy and Buy is estimated at 1.91.

Of the 23 recommendations received by the current ABR, 12 are strong buys and one is buy Strong Buy and Buy accounted for 52.2% and 4.4% of all recommendations, respectively.

Brokerage recommendation trends for FDX

Broker Rating Breakdown Chart for FDX

Broker Rating Breakdown Chart for FDX

Check out the price target and stock forecast for FedEx here>>>

Although ABR calls for buying FedEx, it may not be wise to make an investment decision based on this information alone. Several studies have shown that any success in brokerage recommendations leads investors to pick stocks with the best price growth potential.

Why are you wondering? Brokerage firms’ vested interests in the stocks they cover often cause their analysts to have a strong positive bias in their ratings. Our research shows that for every “strong sell” recommendation, brokerage firms provide five “strong buy” recommendations.

In other words, their interests don’t always align with those of retail investors, rarely indicating where a stock’s price might actually go. Therefore, the best use of this information may be to do your own research or check an index that has proven to be highly successful in predicting a stock’s price movement.

With an impressive externally audited track record, our proprietary stock rating tool, Zacks Rank, which categorizes stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell) is a reliable indicator. A stock’s near-term price performance. Hence, checking the Zacks Rank with ABR can go a long way in making a profitable investment decision.

Zacks Rank should not be confused with ABR

Although Zacks Rank and ABR both appear on a scale from 1 to 5, they are two completely different measures.

Broker recommendations are the sole basis for calculating the ABR, which is usually expressed in decimals (eg 1.28). On the other hand, Zacks Rank is a quantitative model designed to exploit the power of earnings forecast revisions. It is displayed in whole numbers — 1 to 5.

Analysts employed by brokerage firms have been and continue to be overly optimistic with their recommendations. Because the ratings issued by these analysts are more favorable than their employers’ interests would justify their research, they mislead investors more than they guide them.

On the other hand, earnings estimate revisions are rooted in the Zacks Rank. And empirical research shows a strong correlation between earnings estimate revisions and trends in near-term stock price movements.

Furthermore, the various grades of the Zacks Rank are applied proportionately across all stocks for which brokerage analysts provide current year earnings estimates. In other words, at all times, this tool maintains a balance between the five prescribed terms.

There is also a key difference between ABR and Zacks Rank in terms of freshness. When you see the ABR, it may not be up-to-date. Nevertheless, because brokerage analysts constantly revise their earnings estimates to reflect changing business trends and their actions are reflected in the Zacks Rank fairly quickly, it is always timely in predicting future stock prices.

Is FDX Worth Investing?

The Zacks Consensus Estimate for the current year rose 10.6% last month to $14.80, given the revised earnings estimate for FedEx.

Analysts’ growing optimism about the company’s earnings prospects, as indicated by their strong agreement on revising EPS estimates higher, could be a legitimate reason for the stock to rise in the near term.

A Zacks Rank #2 (Buy) for FedEx has shaped the recent change in consensus estimates, along with three other factors related to earnings estimates. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>

Therefore, the buy-equivalent ABR for FedEx can serve as a useful guide for investors.

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