When deciding whether to buy, sell or hold a stock, investors often rely on analyst recommendations. Media reports of rating changes by these analysts employed (or selling) at brokerage firms often influence a stock’s price, but do they really matter?
Before we discuss the reliability of brokerage recommendations and how you can use them to your advantage, let’s see what these Wall Street heavyweights think Unity Software Inc. (U).
Unity Software currently has an average brokerage recommendation (ABR) of 1.81 on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on actual recommendations (Buy, Hold, Sell, etc.) from 26 brokerage firms. An ABR of 1.81 is roughly between Strong Buy and Buy.
Of the 26 recommendations that derive the current ABR, 15 are Strong Buy and one is Buy. “Strong Buy” and “Buy” account for 57.7% and 3.9% of all recommendations, respectively.
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Brokerage Recommendation Trends for U
Broker Rating Breakdown Chart for U
Price target and stock forecast for Unity Software can be found here>>>
Although the ABR encourages the purchase of Unity Software, it may not be advisable to make an investment decision based solely on this information. Multiple studies have shown that broker recommendations have limited or no success in selecting stocks with the best price appreciation potential.
Are you wondering why? Because of 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 give five Strong Buy recommendations for every Strong Sell recommendation.
In other words, their interests don’t always align with those of retail investors and rarely provide any indication of where a stock’s price might actually go. Therefore, the best use of this information might be to validate 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, outside-audited track record of success, 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 near-term price performance. Therefore, using the ABR to validate the Zacks Rank could be an efficient way to make a profitable investment decision.
ABR should not be confused with Zacks Rank
Although both the Zacks Rank and ABR are displayed in a range of 1 to 5, they are different measures overall.
The ABR is calculated exclusively based on broker recommendations and is typically displayed in decimal numbers (example: 1.28). In contrast, the Zacks Rank is a quantitative model that allows investors to harness the power of earnings estimate revisions. The display is in whole numbers – 1 to 5.
The analysts employed by brokerage firms were and are too optimistic with their recommendations. Because the ratings issued by these analysts are more favorable than their research would suggest due to their employers’ self-interest, they mislead investors far more often than they guide.
In contrast, the Zacks Rank is determined by earnings estimate revisions. And near-term stock price movements are strongly correlated with trends in earnings estimate revisions, according to empirical research.
Additionally, the different Zacks Ranks are applied proportionally to all stocks for which broker analysts provide current-year earnings estimates. In other words, this tool always maintains balance between its five ranks.
Another key difference between ABR and Zacks Rank is freshness. The ABR is not necessarily current when you look at it. However, because brokerage analysts constantly revise their earnings estimates to reflect a company’s changing business trends, and their actions are reflected quickly enough in the Zacks Rank, it is always current to indicate future price movements.
Is U a good investment?
Looking at earnings estimate revisions for Unity Software, the Zacks Consensus Estimate for the current year has risen 5.6% to $1.03 over the past month.
Analysts’ growing optimism about the company’s earnings outlook, as evidenced by the strong consensus among them in raising EPS estimates, could be a legitimate reason for the stock’s near-term run higher.
The magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, have resulted in Unity Software earning a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here >>>>
Therefore, the purchase equivalent ABR for Unity Software can serve as a useful guide for investors.
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Unity Software Inc. (U): Free stock analysis report
This article was originally published on Zacks Investment Research (zacks.com).
Zacks Investment Research
https://finance.yahoo.com/markets/stocks/articles/wall-street-analysts-see-unity-133005101.html
