Investors often rely on Wall Street analysts’ recommendations for stock decisions. Currently, Costco (COST) has an average brokerage recommendation (ABR) of 1.81, suggesting a Strong Buy, with 19 out of 35 analysts recommending Strong Buy. However, relying solely on these ratings can be misleading due to analysts’ potential biases linked to their firms’ interests. Studies show a tendency for excessively positive ratings, with five Strong Buys for each Strong Sell. In contrast, the Zacks Rank, based on earnings estimate revisions, provides timely and balanced stock performance indicators. Costco holds a Zacks Rank #2 (Buy), reflecting positive earnings outlooks.
Before deciding to buy, sell, or hold a stock, many investors look to the recommendations provided by Wall Street analysts. While news stories about alterations in ratings from these brokerage-employed (or sell-side) analysts can influence stock prices, are their insights truly significant?
To understand the dependability of brokerage recommendations and how to effectively use them, let’s examine what these Wall Street experts are saying about Costco (COST).
Currently, Costco holds an average brokerage recommendation (ABR) of 1.81, based on a scale from 1 to 5 (from Strong Buy to Strong Sell), derived from the actual recommendations (Buy, Hold, Sell, etc.) provided by 35 brokerage firms. This ABR of 1.81 is positioned between Strong Buy and Buy.
Out of the 35 recommendations that contribute to the current ABR, 19 are classified as Strong Buy, and three are classified as Buy. Strong Buy and Buy account for approximately 54.3% and 8.6% of all recommendations, respectively.
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Even though the ABR suggests purchasing Costco, it is not advisable to base your investment decision solely on this recommendation. Research has indicated that brokerage recommendations have limited success in helping investors select stocks with the highest potential for price appreciation.
Curious why that is? Brokerage firms often have vested interests in the stocks they cover, resulting in a pronounced positive bias in their analysts’ ratings. Our findings indicate that for each “Strong Sell” recommendation, there are five “Strong Buy” recommendations issued by these firms.
In essence, their incentives don’t always align with those of retail investors, and their ratings rarely reflect the actual direction a stock’s price may take. Consequently, the most effective use of this information could involve validating your own research or confirming indications that have proven successful in predicting stock price movements.
With a solid externally audited history, our proprietary stock rating tool, the Zacks Rank—which categorizes stocks into five groups from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell)—serves as a dependable predictor of a stock’s near-term price performance. Therefore, corroborating the Zacks Rank with ABR may significantly enhance the likelihood of making a profitable investment decision.
Despite both Zacks Rank and ABR being represented on a scale from 1 to 5, they are distinct metrics.
The ABR calculation is based solely on broker recommendations, typically shown in decimal form (like 1.28). In contrast, the Zacks Rank employs a quantitative methodology that leverages earnings estimate revisions and displays results in whole numbers—ranging from 1 to 5.