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Marvell (MRVL) Is Considered a Good Investment by Brokers: Is That True?

When deciding whether to buy, sell, or hold a stock, investors often rely on analyst recommendations. Media reports about rating changes by these brokerage-firm-employed (or sell-side) analysts often influence a stock's price, but are they really important?

Let's take a look at what these Wall Street heavyweights have to say about Marvell Technology (MRVL) before we discuss the reliability of brokerage recommendations and how to use them to your advantage.

Marvell currently has an average brokerage recommendation (ABR) of 1.14, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) made by 28 brokerage firms. An ABR of 1.14 approximates between Strong Buy and Buy.

Of the 28 recommendations that derive the current ABR, 25 are Strong Buy and two are Buy. Strong Buy and Buy respectively account for 89.3% and 7.1% of all recommendations.

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Brokerage Recommendation Trends for MRVL

Broker Rating Breakdown Chart for MRVL
Broker Rating Breakdown Chart for MRVL



Check price target & stock forecast for Marvell here>>>

While the ABR calls for buying Marvell, 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.

Do you wonder why? As a result of the vested interest of brokerage firms in a stock they cover, their analysts tend to rate it with a strong positive bias. According to our research, brokerage firms assign five "Strong Buy" recommendations for every "Strong Sell" recommendation.

In other words, their interests aren't always aligned with retail investors, rarely indicating where the price of a stock could actually be heading. Therefore, the best use of this information could be validating your own research or an indicator that has proven to be highly successful in predicting a stock's price movement.

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.

ABR Should Not Be Confused With Zacks Rank

Although both Zacks Rank and ABR are displayed in a range of 1-5, they are different measures altogether.

Broker recommendations are the sole basis for calculating the ABR, which is typically displayed in decimals (such as 1.28). The Zacks Rank, 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.

It has been and continues to be the case that analysts employed by brokerage firms are overly optimistic with their recommendations. Because of their employers' vested interests, these analysts issue more favorable ratings than their research would support, misguiding investors far more often than helping them.

On the other hand, earnings estimate revisions are at the core of the Zacks Rank. And empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

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.

There is also a key difference between the ABR and Zacks Rank when it comes to freshness. When you look at the ABR, it may not be up-to-date. Nonetheless, since brokerage analysts constantly revise their earnings estimates to reflect changing business trends, and their actions get reflected in the Zacks Rank quickly enough, it is always timely in predicting future stock prices.

Is MRVL Worth Investing In?

Looking at the earnings estimate revisions for Marvell, the Zacks Consensus Estimate for the current year has increased 1.6% over the past month to $1.36.

Analysts' growing optimism over the company's earnings prospects, as indicated by strong agreement among them in revising EPS estimates higher, could be a legitimate reason for the stock to soar 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 #2 (Buy) for Marvell. You can see the complete list of today's Zacks Rank #1 (Strong Buy) stocks here >>>>

Therefore, the Buy-equivalent ABR for Marvell may serve as a useful guide for investors.

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Marvell Technology, Inc. (MRVL) : Free Stock Analysis Report

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