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?
Let’s take a look at what these Wall Street heavyweights have to say Energy Transfer LP (ET) earlier we discuss the reliability of brokerage recommendations and how to use them to your advantage.
Energy Transfer LP currently has an average brokerage recommendation (ABR) of 1.09, calculated based on actual recommendations (buy, hold, sell, etc.) made by 11 brokerages, on a scale of 1 to 5 (strong buy to strong sell). The firm estimates an ABR of 1.09 between Strong Buy and Buy.
Of the 11 recommendations received by the current ABR, 10 are strong buys and one is buy Strong Buy and Buy accounted for 90.9% and 9.1% of all recommendations, respectively.
Brokerage recommendation trend for ET
View price targets and stock forecasts for Energy Transfer LP here>>>
While ABR calls for Energy Transfer LP to buy, 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 both Zacks Rank and ABR are displayed on a range of 1-5, they are 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 are overly optimistic about their recommendations given that the phenomenon has occurred and is continuing. Driven by the interests of their employers, these analysts issue more favorable ratings than their research supports, confusing investors more often than helping them.
In contrast, the Zacks Rank is driven by revisions to earnings estimates. And near-term stock price movements are strongly correlated with the tendency to revise earnings estimates, according to empirical research.
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.
Another key difference between ABR and Zacks Rank is freshness. ABR is not necessarily up-to-date when you view it. But, since brokerage analysts tend to revise their earnings estimates to account for a company’s changing business trends, and their actions are quickly reflected in the Zacks Rank, it is always timely in indicating future price movements.
Is it worth the investment?
After revising earnings estimates for Energy Transfer LP, the Zacks Consensus Estimate for the current year is unchanged from last month at $1.43.
Analysts’ persistent opinion about the company’s earnings potential, as indicated by an unchanged consensus estimate, can be a valid reason for the stock to perform in line with the broader market in the near term.
The size of the recent change in consensus estimates, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #3 (Hold) for Energy Transfer LP. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
So it might be wise to be a little cautious with the buy-equivalent ABR for Energy Transfer LP.
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