To Trust or Not to Trust?
are these recommendations truly reliable?
Let's take Valero Energy as an example. Currently, the average brokerage recommendation (ABR) for Valero Energy sits at 1.67, indicating a "Strong Buy" to "Buy" rating. This rating is based on the recommendations of 18 brokerage firms, with 13 of them issuing a "Strong Buy" recommendation.
While this ABR suggests buying Valero Energy, it's crucial to approach this information with caution. Studies have shown that brokerage recommendations often fail to predict stock price increases effectively. This is primarily due to the vested interests of brokerage firms, which can lead to biased and overly optimistic ratings.
Instead of solely relying on ABR, consider using it as a validation tool for your own research or in conjunction with other indicators, such as the Zacks Rank.
The Zacks Rank, a proprietary stock rating tool, categorizes stocks into five groups based on their expected price performance in the near future. Unlike ABR, the Zacks Rank is driven by earnings estimate revisions, which have been proven to be a strong indicator of future stock price movements.
In the case of Valero Energy, the Zacks Rank stands at #5 (Strong Sell), indicating a potential decline in the near term. This is supported by the recent downward revisions in earnings estimates for the company.
Therefore, while the ABR suggests buying Valero Energy, the Zacks Rank paints a different picture. It's important to consider both perspectives and conduct your own research before making any investment decisions.