Investors often rely on analyst advice when deciding whether to buy, sell or hold stocks. Media reports that rating changes from these brokerage (or seller) analysts often affect the price of stocks, but do they really matter?
Before we discuss the reliability of brokerage advice and how to use them to your advantage, let's take a look at what these Wall Street heavyweights think of Marvell Technology (MRVL).
Marvell's current average brokerage recommendation (ABR) is 1.48, with a ratio of 1 to 5 (strong trading), calculated based on actual recommendations (buy, buy, sell, sell, sell, sell, sell, etc.) developed by 33 brokerage firms. The 1.48 approximation of ABR is between forced buying and buying.
Of the 33 suggestions that draw the current ABR, 24 are strong buys, while 24 are buys. Strong purchases and purchases account for 72.7% and 6.1% of all recommendations, respectively.
MRVL's broker rating breakdown chart
Check Marvell's price targets and stock forecasts here>>>
ABR recommends buying Marvell, but making investment decisions based on this information alone may not be a good idea. According to several studies, brokerage advice has little or no success in guiding investors to choose stocks with the greatest price appreciation.
Do you want to know why? A brokerage firm’s vested interest in the covered stocks often leads to a strong positive bias from its analysts to evaluate it. Our research shows that for each “strong sell” proposal, the brokerage firm will assign five “strong buy” proposals.
In other words, their interests are not always consistent with retail investors, and rarely indicate where the stock's price may actually be. Therefore, best use of this information may be an indicator that validates your own research or has proven to be very successful in predicting stock price movements.
With an impressive external audit record, our proprietary stock rating tool, Zacks Rank, divides stocks into five groups, from Zacks Level 1 (Strong Buy) to Zacks Level 5 (Strong Sell), which is a reliable indicator of stock's recent price performance. Therefore, validating Zacks ranking with ABR may be of great help in making profitable investment decisions.
Although the Zacks rating and ABR display ranges from 1-5, they are completely different measures.
ABR is calculated based on brokerage suggestions only and is usually displayed in decimals (Example: 1.28). In contrast, the Zacks ranking is a quantitative model that allows investors to take advantage of the power of earnings estimation. It shows -1 to 5 in full numbers.
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Analysts used by brokerage firms are too optimistic about their advice. Due to the vested interests of employers, these analysts have higher ratings than their research, and misleading investors far more often than helping them.
On the other hand, earnings estimate revisions are at the heart of the Zacks level. Empirical research shows that there is a strong correlation between the revision of earnings estimates and the trend of recent stock price movements.
In addition, the different levels of Zacks are applied in proportion to all stocks that brokerage analysts provide for the year's earnings estimates. In other words, at any time, this tool balances between the five assigned levels.
There is also a key difference between ABR and Zacks rankings in terms of freshness. When you look at the ABR, it may not be the latest. Nevertheless, as broker analysts constantly modify their earnings estimates to reflect changing business trends, and their actions are ranked quickly enough in the Zacks, it is always timely in predicting future stock prices.
Looking at Marvell's earnings estimate revision, Zacks's consensus estimate for the year has dropped 0% to $2.79 in the past month.
Analysts are growing pessimism about the company’s earnings outlook, as strong agreement between them under revised earnings estimates suggests, which may be a reasonable reason for the stock to plummet in the near term.
The scale of the latest changes in consensus estimates and three other factors related to earnings estimates led to Marvell's Zacks ranking No. 5 (strong sell). You can view the full list of today's Zacks Ranking 1 (Strong Buy) stocks here >>>>>
So it might be wise to buy a grain of salt with Marvell's ABR.
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Marvell Technology, Inc. (MRVL): Free Stock Analysis Report
This article was originally published on Zacks Investment Research (Zacks.com).
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