The consensus of Wall Street analysts holds considerable weight in the minds of investors as they deliberate on their stock trading decisions. The impact of these analysts’ opinions on stock prices is often a topic of media discussion. But how much should we really rely on these recommendations?
Before delving into the reliability of brokerage recommendations and how investors can leverage them to their advantage, let’s take a closer look at what Wall Street heavyweights are saying about Advanced Micro Devices (AMD).
As it stands, Advanced Micro currently holds an average brokerage recommendation (ABR) of 1.36, which falls between Strong Buy and Buy on a scale from 1 to 5. This rating is derived from the collective recommendations (Buy, Hold, Sell, etc.) of 29 brokerage firms. Out of these ratings, 23 are Strong Buy and one is Buy, constituting 79.3% and 3.5% of all recommendations, respectively.
Brokerage Recommendation Trends for AMD
While the ABR points toward a recommendation to purchase Advanced Micro, it’s important for investors not to rely solely on this metric. Several studies have indicated that brokerage recommendations offer limited success in predicting stocks with the highest potential for price increases.
Why is that, you may wonder? It often stems from the vested interest of brokerage firms in the stocks they cover, leading to a strong positive bias among their analysts when rating them. Research has shown that for every “Strong Sell” recommendation, brokerage firms assign five “Strong Buy” recommendations. This misalignment of interests may not provide deep insights into a stock’s future price movement. Therefore, it’s advisable to use this information to validate your own analysis or a proven tool for predicting stock price movements.
Our proprietary stock rating tool, the Zacks Rank, offers an externally audited track record and classifies stocks into five groups, from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), serving as a dependable indicator of a stock’s near-term price performance. Thus, validating the Zacks Rank with ABR can significantly aid in making sound investment decisions.
ABR Should Not Be Confused With Zacks Rank
Despite both the Zacks Rank and ABR being displayed in a range of 1-5, they are fundamentally distinct metrics. The ABR is deduced solely from broker recommendations and is typically displayed in decimals. Conversely, the Zacks Rank is a quantitative model dependent on harnessing the power of earnings estimate revisions and is displayed in whole numbers.
Brokerage analysts have historically exhibited an overly optimistic tone in their recommendations due to the vested interest of their employers, often providing ratings that are more favorable than their research would support. On the other hand, the Zacks Rank is driven by earnings estimate revisions, and empirical research has highlighted a strong correlation between near-term stock price movements and trends in earnings estimate revisions.
Distinguishably, the different grades of the Zacks Rank are applied proportionately across all stocks for which brokerage analysts provide earnings estimates for the current year, maintaining a balanced approach at all times. Moreover, the Zacks Rank is more timely in reflecting future price movements, given that brokerage analysts continuously amend their earnings estimates to reflect a company’s evolving business trends.
Is AMD Worth Investing In?
Reviewing the earnings estimate revisions for Advanced Micro, the Zacks Consensus Estimate for the current year has held steady at $2.65 over the past month. This stability in analysts’ views regarding the company’s earnings prospects, as depicted by an unaltered consensus estimate, may provide a valid rationale for the stock to perform in line with the broader market in the near term.
The magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, has led to a Zacks Rank #3 (Hold) for Advanced Micro.
Hence, it may be prudent for investors to exercise caution with the Buy-equivalent ABR for Advanced Micro.