Investors often turn to the recommendations of Wall Street analysts before making a buy, sell or hold decision on a stock. While media reports of rating changes by brokerage firm (or sell-side) analysts often impact a stock’s price, do they really matter?

Before we discuss the reliability of broker recommendations and how you can use them to your advantage, let’s see what these Wall Street heavyweights think Chevron (CVX).

Chevron currently has an average broker recommendation (ABR) of 1.73, on a scale of 1 to 5 (strong buy to strong sell), calculated based on the actual recommendations (buy, hold, sell, etc.) of 22 brokerage firms. An ABR of 1.73 approximates between Strong Buy and Buy.

Of the 22 recommendations that make up the current ABR, 13 are Strong Buy and two are Buy. Strong Buy and Buy account for 59.1% and 9.1% of all recommendations respectively.

Trends in Broker Recommendations for CVX

View the price target and stock forecast for Chevron here>>>

Although the ABR calls for buying Chevron, it may not be wise to make an investment decision based solely on this information. Several studies have found that broker recommendations have limited to no success in guiding investors in choosing stocks with the best price appreciation potential.

Are you wondering why? Due to brokerage firms’ vested interest 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 do not always align with those of private investors, which rarely indicates where a share’s price might actually go. Therefore, the best use of this information could be to validate your own research or an indicator that has proven very successful in predicting a stock’s price movement.

With an impressive outside-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 price movement. share in the short term. So, validating the Zacks Rank with ABR can go a long way toward making a profitable investment decision.

Zacks Rank should not be confused with ABR

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

The ABR is calculated solely based on broker recommendations and is usually represented by decimals (for example: 1.28). The Zacks Rank, on the other hand, is a quantitative model that allows investors to harness the power of earnings estimate revisions. It is represented in whole numbers: 1 to 5.

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It remains the case that analysts at brokerage firms are too optimistic about their recommendations. Due to the vested interests of their employers, these analysts issue more favorable ratings than their research would show, misleading rather than helping investors far more often.

The Zacks Rank, on the other hand, is determined by earnings estimate revisions. And according to empirical research, near-term stock price movements are strongly correlated with trends in earnings estimate revisions.

Additionally, the various grades of the Zacks Rank are applied proportionately to all stocks for which brokerage analysts provide current-year earnings estimates. In other words, this instrument maintains a balance between the five ranks it awards at all times.

There is also an important difference between the ABR and the Zacks Rank when it comes to freshness. If you look at the ABR, it may not be current. Nevertheless, since stock analysts are constantly revising their earnings estimates to reflect changing business trends, and their actions are reflected in the Zacks Rank quickly enough, it is always timely for predicting future stock prices.

Is CVX a good investment?

Looking at earnings estimate revisions for Chevron, the Zacks Consensus Estimate for the current year has fallen 2.6% over the past month to $11.06.

Analysts’ growing pessimism about the company’s earnings prospects, as evidenced by strong agreement among them on lowering earnings estimates, could be a legitimate reason for a near-term share price decline.

The magnitude of the recent change in consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank of #4 (Sell) for Chevron. You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>

Therefore, it may be wise to take the Buy-equivalent ABR for Chevron with a grain of salt.

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