Investors often look to recommendations from Wall Street analysts before making a decision to buy, sell or hold a stock. While media reports of rating changes by these analysts employed by brokerage firms (or salespersons) often affect a stock’s price, 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. Enterprise Product Partners (EPD).

Enterprise Products currently has an Average Brokerage Recommendation (ABR) of 1.50, on a scale of 1-5 (strong buy to strong sell), calculated based on the actual recommendations (buy, hold, sell, etc.) made by 12 brokerage firms. An ABR of 1.50 approximates between Strong Buy and Buy.

Of the 12 recommendations that derive from the current ABR, nine are Strong Buy, representing 75% of all recommendations.

Broker Recommendation Trends for EPD

EPD Broker Rating Breakdown Table

EPD Broker Rating Breakdown Table

Check price target and stock forecast for enterprise products here>>>

Although the ABR calls for the purchase of enterprise products, it may not be wise to make an investment decision solely on the basis of this information. Several studies have shown limited, if any, success with brokerage recommendations in guiding investors in choosing stocks with the best potential for price increases.

You wonder why ? Due to brokerage firms’ vested interest in a stock they are covering, their analysts tend to rate it with a strong positive bias. According to our research, brokerage firms award five “Strong Buy” recommendations for every “Strong Sell” recommendation.

In other words, their interests are not always aligned with those of retail investors, rarely indicating where a stock’s price might actually be heading. Therefore, the best use of this information might be to validate your own research or an indicator that has proven to be very effective in predicting a stock’s price movement.

With an impressive externally audited track record, our proprietary stock rating tool, Zacks Rank, which ranks stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), is a reliable indicator of the short-term price movement of a share. Thus, validating the Zacks ranking with ABR could go a long way towards making a profitable investment decision.

ABR should not be confused with Zacks rank

Despite the fact that Zacks Rank and ABR both appear on a scale of 1-5, they are two completely different metrics.

Broker recommendations are the sole basis for calculating ABR, which is usually displayed in decimals (like 1.28). The Zacks Ranking, on the other hand, is a quantitative model designed to harness the power of earnings estimate revisions. It is displayed in whole numbers — 1 to 5.

Analysts employed by brokerage firms have been and continue to be overly optimistic about their recommendations. Since the ratings assigned by these analysts are more favorable than their research would support due to the self-interest of their employers, they deceive investors far more often than they guide them.

In contrast, the Zacks ranking is determined by earnings estimate revisions. And short-term stock price movements are strongly correlated with trends in earnings estimate revisions, according to empirical research.

In addition, the various Zacks Rank ratings are applied proportionately to all stocks for which brokerage analysts provide current year earnings estimates. In other words, this tool always maintains a balance between its five ranks.

There is also a key difference between the ABR and the Zacks rating when it comes to freshness. When you look at the ABR, it may not be up to date. Nevertheless, since brokerage analysts are constantly revising their earnings estimates to reflect changing trading trends and their stocks are reflected fairly quickly in the Zacks rankings, it is always a good idea to predict future stock prices.

Is EPD worth investing in?

In terms of revisions to earnings estimates for enterprise products, Zacks consensus estimate for the current year was unchanged over the past month at $2.47.

Analysts’ consistent views on the company’s earnings outlook, as indicated by an unchanged consensus estimate, could be a legitimate reason 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, resulted in a Zacks No. 3 (holding) ranking for enterprise products. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>

It may therefore be prudent to be a little cautious with the ABR equivalent to the purchase for enterprise products.

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