Investors often lean on analyst recommendations to guide their stock decisions. But, just how critical are these brokerage-firm-employed analysts’ ratings?
Before diving into the reliability of brokerage recommendations and how to utilize them to your advantage, let’s uncover what Wall Street heavyweights have to say about Alibaba (BABA).
At present, Alibaba holds an average brokerage recommendation (ABR) of 1.27, hovering between Strong Buy and Buy on a scale of 1 to 5. Of the 15 recommendations factored into the ABR, 13 chalk up to Strong Buy, a significant 86.7% of all endorsements.
Brokerage Recommendation Trends for BABA
[Brokerage Rating Breakdown Chart for BABA]
The ABR portrays Alibaba as a buy, but relying solely on this metric may not be a prudent choice. Research indicates that brokerage recommendations have minimal success in identifying stocks with the most potential for appreciation.
Why the doubt? Analysts, driven by their firms’ interests, tend to heavily favor the stocks they cover, as evidenced by a notable bias towards positive ratings. For every “Strong Sell” recommendation, five “Strong Buy” endorsements emerge, illustrating a clear divergence in alignment between brokerage interests and the likely trajectory of a stock’s price.
Subsequently, the most prudent use of this data may be to validate your independent research or pair it with proven indicators of a stock’s price movement.
The Zacks Rank, a robust stock rating tool with strong track records, classifies stocks from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell) based on earnings estimate revisions. Therefore, utilizing the ABR to confirm the Zacks Rank can lead to sound investment decisions.
ABR vs. Zacks Rank
While both ABR and Zacks Rank live on a scale from 1 to 5, they stand as distinct metrics.
The ABR hinges entirely on brokerage recommendations, often displaying decimals (e.g., 1.28). On the contrary, the Zacks Rank leverages a quantitative model that taps into earnings estimate revisions, showcased as whole numbers from 1 to 5.
Historically, brokerage analysts demonstrate an overly optimistic bias in their ratings due to their firms’ vested interests. Conversely, the Zacks Rank heavily relies on earnings estimate revisions, a factor that exhibits a robust correlation with near-term stock price movements.
Furthermore, the different Zacks Rank tiers apply proportionately across all stocks with current-year earnings estimates, ensuring balanced representation.
There’s also a key timing distinction between the ABR and Zacks Rank. While the ABR may lack real-time updates, the Zacks Rank promptly reflects analyst-issued earnings estimate revisions, providing timely predictions of future stock prices.
Is BABA Worth Investing In?
Regarding earnings estimate revisions for Alibaba, the Zacks Consensus Estimate for the current year has dipped by 3.1% over the last month to $8.86. The convergence of analysts in slashing EPS estimates mirrors growing pessimism about the company’s earnings outlook, contributing to a Zacks Rank #4 (Sell) for Alibaba.
Given these developments, it would be sensible to take the Buy-equivalent ABR for Alibaba with a pinch of skepticism.
Only $1 to See All Zacks’ Buys and Sells
We’re not kidding.
Several years back, we took our members by surprise by granting them 30-day access to all our picks for just $1, without any further obligation. While thousands seized this opportunity, an equal number hesitated, wary of any hidden clauses. The motive was simple: acquainting members with our portfolio services like Surprise Trader, Stocks Under $10, Technology Innovators, among others, which have accrued a string of double- and triple-digit gains from 162 closed positions in 2023 alone.
Interested in the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days for free.