Investors often rely on Wall Street analysts’ recommendations when deciding whether to buy, sell, or hold a stock. While media reports about rating changes from these analysts can impact stock prices, are they truly reliable? Let’s delve into the world of analyst ratings and explore what these financial heavyweights have to say about Celestica (CLS) before discussing the reliability of brokerage recommendations and how to leverage them effectively.
Celestica currently holds an average brokerage recommendation (ABR) of 1.57, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated from seven brokerage firms. This ABR, falling between Strong Buy and Buy, suggests a positive outlook for the stock. Out of the seven recommendations, four are Strong Buy and two are Buy, accounting for 57.1% and 28.6% of the total, respectively.
While the ABR encourages buying Celestica, solely relying on this information for investment decisions might not be wise. Numerous studies have shown limited to no success in using brokerage recommendations to identify stocks with the highest potential price increase. Why is this? Well, brokerage firms often exhibit a strong positive bias towards stocks they cover due to their vested interests. Research reveals that brokerage firms assign five “Strong Buy” recommendations for every “Strong Sell,” suggesting that their priorities may not align with retail investors, often failing to accurately predict stock price movements.
So, how should investors utilize this information effectively? It can serve as a valuable tool for validating personal research or as an indicator alongside a more reliable tool for predicting stock price movements. Enter the Zacks Rank, a proprietary stock rating tool with a proven track record. The Zacks Rank categorizes stocks into five groups, from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), and has proven to be an effective indicator of near-term stock price performance. Combining the ABR with the Zacks Rank can offer a powerful and efficient approach to making profitable investment decisions.
Despite the fact that both Zacks Rank and ABR use a 1 to 5 scale, they are distinct measures. The ABR is solely based on brokerage recommendations and typically expressed in decimals, such as 1.28. On the other hand, the Zacks Rank is a quantitative model leveraging the power of earnings estimate revisions, represented by whole numbers from 1 to 5. This model has consistently demonstrated a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
Furthermore, the Zacks Rank applies its grades proportionally across all stocks for which brokerage analysts provide current-year earnings estimates, ensuring a balance among its five ranks. The ABR, however, lacks this consistent balance and may not be always up-to-date. In contrast, the Zacks Rank is always timely, reflecting real-time updates in analysts’ earnings estimates, making it a more reliable indicator of future price movements.
Now, let’s analyze Celestica’s investment potential. The Zacks Consensus Estimate for Celestica’s current-year earnings remains unchanged at $3.65, signifying analysts’ steady views regarding the company’s earnings prospects. This unchanged consensus estimate could be a valid reason for the stock to perform in line with the broader market in the near term. However, based on recent changes in the consensus estimate and three other crucial factors related to earnings estimates, Celestica currently holds a Zacks Rank #3 (Hold). Therefore, exercising some caution with the Buy-equivalent ABR for Celestica may be prudent.
