Advertisement
New Zealand markets closed
  • NZX 50

    11,799.67
    -117.11 (-0.98%)
     
  • NZD/USD

    0.5893
    -0.0013 (-0.22%)
     
  • NZD/EUR

    0.5549
    -0.0005 (-0.09%)
     
  • ALL ORDS

    7,861.40
    -148.00 (-1.85%)
     
  • ASX 200

    7,611.70
    -140.80 (-1.82%)
     
  • OIL

    85.99
    +0.58 (+0.68%)
     
  • GOLD

    2,404.60
    +21.60 (+0.91%)
     
  • NASDAQ

    17,706.83
    -296.65 (-1.65%)
     
  • FTSE

    7,965.53
    -30.05 (-0.38%)
     
  • Dow Jones

    37,735.11
    -248.13 (-0.65%)
     
  • DAX

    18,026.58
    +96.26 (+0.54%)
     
  • Hang Seng

    16,302.74
    -297.72 (-1.79%)
     
  • NIKKEI 225

    38,412.42
    -820.38 (-2.09%)
     
  • NZD/JPY

    90.9320
    -0.0950 (-0.10%)
     

Wall Street Bulls Look Optimistic About Broadcom Inc. (AVGO): Should You Buy?

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?

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 about Broadcom Inc. (AVGO).

Broadcom Inc. currently has an average brokerage recommendation (ABR) of 1.32, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) made by 25 brokerage firms. An ABR of 1.32 approximates between Strong Buy and Buy.

Of the 25 recommendations that derive the current ABR, 21 are Strong Buy, representing 84% of all recommendations.

ADVERTISEMENT

Brokerage Recommendation Trends for AVGO

Broker Rating Breakdown Chart for AVGO
Broker Rating Breakdown Chart for AVGO



Check price target & stock forecast for Broadcom Inc. here>>>

While the ABR calls for buying Broadcom Inc., 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.

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.

Zacks Rank, our proprietary stock rating tool with an impressive externally audited track record, categorizes stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), and is an effective indicator of a stock's price performance in the near future. Therefore, using the ABR to validate the Zacks Rank could be an efficient way of 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.

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.

Furthermore, the different grades of the Zacks Rank are applied proportionately across all stocks for which brokerage analysts provide earnings estimates for the current year. In other words, at all times, this tool maintains a balance among the five ranks it assigns.

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 AVGO a Good Investment?

Looking at the earnings estimate revisions for Broadcom Inc., the Zacks Consensus Estimate for the current year has declined 0.8% over the past month to $46.90.

Analysts' growing pessimism over the company's earnings prospects, as indicated by strong agreement among them in revising EPS estimates lower, could be a legitimate reason for the stock to plunge 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 #4 (Sell) for Broadcom Inc. You can see the complete list of today's Zacks Rank #1 (Strong Buy) stocks here >>>>

Therefore, it could be wise to take the Buy-equivalent ABR for Broadcom Inc. with a grain of salt.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Broadcom Inc. (AVGO) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research