Investors often rely on Wall Street analysts’ recommendations when deciding whether to buy, sell, or hold a stock. When these analysts change their ratings, it can significantly impact a stock’s price. But how reliable are these recommendations? Let’s delve into the world of Wall Street and see what the experts have to say about TJX (TJX).
TJX currently has an average brokerage recommendation (ABR) of 1.24, on a scale of 1 to 5 (Strong Buy to Strong Sell). This rating is based on recommendations from 25 brokerage firms. An ABR of 1.24 falls somewhere between a Strong Buy and a Buy. Out of the 25 recommendations, a whopping 22 are Strong Buy, accounting for 88% of all recommendations.
While the ABR suggests buying TJX, relying solely on this information for investment decisions might not be wise. Several studies have shown that brokerage recommendations don’t always successfully guide investors towards stocks with the most potential for price appreciation. Why is this? Brokerage firms have a vested interest in the stocks they cover, often leading to a strong positive bias in their analysts’ ratings. Our research reveals that for every “Strong Sell” recommendation, brokerage firms issue five “Strong Buy” recommendations. This suggests their interests might not align with retail investors, and they might not accurately predict a stock’s future price movement.
Instead of solely relying on ABR, you can use it to validate your own research or as an indicator alongside proven methods like the Zacks Rank. The Zacks Rank, a proprietary stock rating tool, classifies stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell). It boasts a strong track record and is a reliable indicator of near-term price performance. Combining the Zacks Rank with the ABR can help you make more informed investment decisions.
It’s crucial to remember that the ABR and Zacks Rank are distinct measures, despite both being on a scale from 1 to 5. The ABR is solely based on brokerage recommendations and typically includes decimals (e.g., 1.28), while the Zacks Rank is a quantitative model based on earnings estimate revisions. It uses whole numbers (1 to 5) and is driven by the power of these revisions. Empirical research shows a strong correlation between near-term stock price movements and trends in earnings estimate revisions. Unlike brokerage recommendations, the Zacks Rank assigns its grades proportionally across all stocks covered by analysts for the current year, maintaining a balance among the five ranks.
The Zacks Rank also has an advantage in terms of timeliness. While the ABR might not be up-to-date, the Zacks Rank reflects analysts’ constantly revised earnings estimates, providing a timely predictor of future stock prices.
So, should you invest in TJX? The Zacks Consensus Estimate for TJX’s earnings this year has remained unchanged at $4.15 over the past month. This indicates that analysts’ views on the company’s earnings prospects are stable. However, based on the size of the recent change in the consensus estimate and other earnings estimate factors, TJX currently holds a Zacks Rank #3 (Hold). This suggests that while the ABR might suggest a buy, a more cautious approach might be prudent given the Zacks Rank.
