Investors often rely on recommendations from Wall Street analysts to guide their Buy, Sell, or Hold decisions on stocks. While media coverage of rating changes by these brokerage-firm analysts can impact a stock’s price, how reliable are their assessments? Let’s examine Booking Holdings (BKNG) and the usefulness of brokerage recommendations in general.
Booking Holdings currently boasts an average brokerage recommendation (ABR) of 1.63, on a scale of 1 to 5 (Strong Buy to Strong Sell). This score is based on 32 brokerage firm recommendations, with 21 Strong Buy and 2 Buy ratings. The ABR, falling between Strong Buy and Buy, suggests a favorable outlook for Booking Holdings.
However, solely relying on this ABR for investment decisions might be unwise. Numerous studies have shown that brokerage recommendations have minimal success in directing investors towards stocks with the highest potential for price appreciation. This is due to the inherent conflict of interest: brokerage firms often have a vested interest in the stocks they cover, leading to biased recommendations favoring a “Strong Buy.” Research indicates that brokerage firms assign five “Strong Buy” recommendations for every “Strong Sell,” highlighting this bias.
Therefore, the ABR should be viewed as a supplementary tool, validating your own research or confirming other indicators known for predicting stock price movements. One such indicator is the Zacks Rank, our proprietary stock rating system with a proven track record. The Zacks Rank categorizes stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), effectively indicating a stock’s near-term price performance.
While both the ABR and Zacks Rank utilize a 1 to 5 scale, they are fundamentally different. The ABR solely relies on brokerage recommendations, often presented as decimals (e.g., 1.28). The Zacks Rank, however, is a quantitative model utilizing earnings estimate revisions, displayed in whole numbers (1 to 5).
Historical data consistently shows that brokerage analysts tend to be overly optimistic in their recommendations. Their employers’ vested interests influence them to issue more positive ratings than their research warrants, misleading investors more often than aiding them. Conversely, the Zacks Rank is driven by earnings estimate revisions, which research has shown to be strongly correlated with near-term stock price movements. Additionally, the Zacks Rank assigns its five grades proportionately to all stocks with current-year earnings estimates, ensuring a balanced representation across all ranks.
Another key difference lies in timeliness. The ABR is not necessarily updated regularly. The Zacks Rank, however, is always up-to-date due to analysts continuously revising earnings estimates to reflect company business trends. This responsiveness allows the Zacks Rank to accurately reflect future price movements.
For Booking Holdings, the consensus earnings estimate for the current year remains unchanged at $177.09. This stability in analysts’ earnings prospects could suggest the stock will perform in line with the broader market in the short term. However, this stability, coupled with other factors related to earnings estimates, has resulted in a Zacks Rank #3 (Hold) for Booking Holdings. Therefore, while the ABR suggests a buy, caution should be exercised and the Zacks Rank #3 (Hold) should be considered before making a final investment decision.
