Investors often turn to recommendations made by Wall Street analysts before making a Buy, Sell, or Hold decision about a stock. While media reports about rating changes by these brokerage-firm employed (or sell-side) analysts often affect a stock’s price, do they really matter?
Let’s take a look at what these Wall Street heavyweights have to say about Netflix (NFLX) before we discuss the reliability of brokerage recommendations and how to use them to your advantage.
Netflix (NFLX) Brokerage Recommendations
Netflix currently has an average brokerage recommendation (ABR) of 1.91, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations made by 39 brokerage firms.
Of the 39 recommendations, 21 are Strong Buy and two are Buy, accounting for 53.9% and 5.1% of all recommendations, respectively.
Understanding Brokerage Recommendations
The ABR suggests buying Netflix, but making an investment decision solely on this information might not be ideal. Studies show that brokerage recommendations have limited success guiding investors towards stocks with the most potential for price appreciation due to potential positive biases.
Brokerage firms tend to issue more favorable ratings compared to “Strong Sell” recommendations, potentially misguiding investors along the way.
Comparing ABR with Zacks Rank
Zacks Rank, a stock rating tool, categorizes stocks based on earnings estimate revisions. It ranges from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell) and indicates a stock’s potential price performance.
Earnings estimate revisions play a crucial role in the Zacks Rank, showing a strong correlation with near-term stock price movements, unlike brokerage recommendations.
While ABR may not always be up-to-date, Zacks Rank provides timely insights into future price movements by reflecting analysts’ actions regarding earnings estimates swiftly.
Should You Invest in NFLX?
The Zacks Consensus Estimate for Netflix’s current year earnings has increased by 1% over the past month to $18.31.
The recent increase in consensus estimate has resulted in a Zacks Rank #1 (Strong Buy) for Netflix, pointing towards potential future price appreciation.
In summary, the ABR for Netflix may serve as a useful guide alongside the Zacks Rank for investors.
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