Investors often rely on recommendations from Wall Street analysts before making a buy, sell or hold decision on a stock. While media reports of rating changes by these analysts employed (or selling) at brokerage firms often influence a stock's price, 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 Chevron (CVX).

Chevron currently has an Average Brokerage Recommendation (ABR) of 1.73 on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on actual recommendations (Buy, Hold, Sell, etc.) from 22 brokerage firms. An ABR of 1.73 is roughly between Strong Buy and Buy.

Of the 22 recommendations that derive the current ABR, 13 are “Strong Buy” and two are “Buy”. “Strong Buy” and “Buy” account for 59.1% and 9.1% of all recommendations, respectively.

Brokerage recommendation trends for CVX

Check Chevron price target and stock forecast here>>>

Although the ABR encourages buying Chevron, 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 do not always align with those of private investors and rarely provide any indication of where the price of a stock might actually move. 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.

With an impressive, outside-audited track record of success, our proprietary Zacks Rank stock ratings tool, which divides stocks into five groups from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), is a reliable indicator of a stock's near-term price performance. So, validating the Zacks Rank with ABR could go a long way in making a profitable investment decision.

Zack's rank should not be confused with ABR

Although the Zacks Rank and ABR both appear on a scale of 1 to 5, they are two completely different measures.

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.

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It was and is the case that the analysts employed by brokerage firms are too optimistic with their recommendations. Because of their employers' self-interest, these analysts issue more favorable ratings than their research would support, which misleads investors far more often than it helps them.

In contrast, the Zacks Rank is determined by earnings estimate revisions. And near-term stock price movements are highly correlated with trends in earnings estimate revisions, according to empirical research.

Additionally, the various Zacks Rank ratings are applied proportionally to all stocks for which brokerage analysts provide current-year earnings estimates. In other words, this tool ensures a balance between the five ranks it assigns at all times.

There is also a key difference between the ABR and Zacks Rank when it comes to freshness. If you look at the ABR, it may not be current. However, because brokerage analysts constantly revise their earnings estimates to reflect changing business trends and their actions are reflected in the Zacks Rank quickly enough, they are always timely in predicting future stock prices.

Is CVX a good investment?

Looking at Chevron's earnings estimate revisions, the Zacks Consensus Estimate for the current year has declined 2.6% to $11.06 over the past month.

Analysts' growing pessimism about the company's earnings prospects, evidenced by their broad consensus on lowering EPS estimates, could be a legitimate reason for the stock to plunge in the near term.

The magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, have resulted in Chevron earning a Zacks Rank #4 (Sell). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here >>>>

Therefore, it might be wise to treat Chevron's Buy-equivalent ABR with caution.

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Chevron Corporation (CVX): Free Stock Analysis Report

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