Investors often turn to recommendations made by Wall Street analysts before making a Buy, Sell, or Hold decision about a stock. While media reports about rating changes by these brokerage-firm employed (or sell-side) analysts often affect a stock's price, do they really matter?
Let's take a look at what these Wall Street heavyweights have to say about AGNC Investment (AGNC) before we discuss the reliability of brokerage recommendations and how to use them to your advantage.
AGNC Investment currently has an average brokerage recommendation (ABR) of 1.75, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) made by eight brokerage firms. An ABR of 1.75 approximates between Strong Buy and Buy.
Of the eight recommendations that derive the current ABR, four are Strong Buy and two are Buy. Strong Buy and Buy respectively account for 50% and 25% of all recommendations.
Brokerage Recommendation Trends for AGNC
Check price target & stock forecast for AGNC Investment here>>>
While the ABR calls for buying AGNC Investment, it may not be wise to make an investment decision solely based on this information. Several studies have shown limited to no success of brokerage recommendations in guiding investors to pick stocks with the best price increase potential.
Are you wondering why? The vested interest of brokerage firms in a stock they cover often results in a strong positive bias of their analysts in rating it. Our research shows that for every "Strong Sell" recommendation, brokerage firms assign five "Strong Buy" recommendations.
This means that the interests of these institutions are not always aligned with those of retail investors, giving little insight into the direction of a stock's future price movement. It would therefore be best to use this information to validate your own analysis or a tool that has proven to be highly effective at predicting stock price movements.
With an impressive externally audited track record, our proprietary stock rating tool, the Zacks Rank, which classifies stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), is a reliable indicator of a stock's near -term price performance. So, validating the Zacks Rank with ABR could 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 in a range of 1-5, they are different measures altogether.
The ABR is calculated solely based on brokerage recommendations and is typically displayed with decimals (example: 1.28). In contrast, the Zacks Rank is a quantitative model allowing investors 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 with their recommendations. Since the ratings issued by these analysts are more favorable than their research would support because of the vested interest of their employers, they mislead investors far more often than they guide.
In contrast, the Zacks Rank is driven by earnings estimate revisions. And near-term stock price movements are strongly correlated with trends in earnings estimate revisions, according to empirical research.
In addition, the different Zacks Rank grades are applied proportionately to all stocks for which brokerage analysts provide current-year earnings estimates. In other words, this tool always maintains a balance among its five ranks.
Another key difference between the ABR and Zacks Rank is freshness. The ABR is not necessarily up-to-date when you look at it. But, since brokerage analysts keep revising their earnings estimates to account for a company's changing business trends, and their actions get reflected in the Zacks Rank quickly enough, it is always timely in indicating future price movements.
Is AGNC a Good Investment?
In terms of earnings estimate revisions for AGNC Investment, the Zacks Consensus Estimate for the current year has remained unchanged over the past month at $2.36.
Analysts' steady views regarding the company's earnings prospects, 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 size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #3 (Hold) for AGNC Investment. You can see the complete list of today's Zacks Rank #1 (Strong Buy) stocks here >>>>
It may therefore be prudent to be a little cautious with the Buy-equivalent ABR for AGNC Investment.
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