Yahoo Finance Wall Street Bulls Look Optimistic About Builders FirstSource (BLDR): Should You Buy?
The recommendations of Wall Street analysts are often relied on by investors when deciding whether to buy, sell, or hold a stock. Media reports about these brokerage-firm-employed (or sell-side) analysts changing their ratings often affect a stock's price. Do they really matter, though?
Before we discuss the reliability of brokerage recommendations and how to use them to your advantage, let's see what these Wall Street heavyweights think about Builders FirstSource (BLDR).
Builders FirstSource currently has an average brokerage recommendation (ABR) of 1.56, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) made by 16 brokerage firms. An ABR of 1.56 approximates between Strong Buy and Buy.
Of the 16 recommendations that derive the current ABR, 11 are Strong Buy and one is Buy. Strong Buy and Buy respectively account for 68.8% and 6.3% of all recommendations.
Check price target & stock forecast for Builders FirstSource here>>>
The ABR suggests buying Builders FirstSource, but making an investment decision solely on the basis of this information might not be a good idea. According to several studies, brokerage recommendations have little to no success guiding investors to choose stocks with the most potential for price appreciation.
Do you wonder why? As a result of the vested interest of brokerage firms in a stock they cover, their analysts tend to rate it with a strong positive bias. According to our research, brokerage firms assign five "Strong Buy" recommendations for every "Strong Sell" recommendation.
This means that the interests of these institutions are not always aligned with those of retail investors, giving little insight into the direction of a stock's future price movement. It would therefore be best to use this information to validate your own analysis or a tool that has proven to be highly effective at predicting stock price movements.
With an impressive externally audited track record, our proprietary stock rating tool, the Zacks Rank, which classifies stocks into five groups, ranging 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.
Zacks Rank Should Not Be Confused With ABR
In spite of the fact that Zacks Rank and ABR both appear on a scale from 1 to 5, they are two completely different measures.
Broker recommendations are the sole basis for calculating the ABR, which is typically displayed in decimals (such as 1.28). The Zacks Rank, on the other hand, is a quantitative model designed to harness the power of earnings estimate revisions. It is displayed in whole numbers -- 1 to 5.
It has been and continues to be the case that analysts employed by brokerage firms are overly optimistic with their recommendations. Because of their employers' vested interests, these analysts issue more favorable ratings than their research would support, misguiding investors far more often than helping them.
On the other hand, earnings estimate revisions are at the core of the Zacks Rank. And empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
In addition, the different Zacks Rank grades are applied proportionately to all stocks for which brokerage analysts provide current-year earnings estimates. In other words, this tool always maintains a balance among its five ranks.
There is also a key difference between the ABR and Zacks Rank when it comes to freshness. When you look at the ABR, it may not be up-to-date. Nonetheless, since brokerage analysts constantly revise their earnings estimates to reflect changing business trends, and their actions get reflected in the Zacks Rank quickly enough, it is always timely in predicting future stock prices.
Is BLDR Worth Investing In?
In terms of earnings estimate revisions for Builders FirstSource, the Zacks Consensus Estimate for the current year has declined 1.3% over the past month to $13.83.
Analysts' growing pessimism over the company's earnings prospects, as indicated by strong agreement among them in revising EPS estimates lower, could be a legitimate reason for the stock to plunge in the near term.
The size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #4 (Sell) for Builders FirstSource. You can see the complete list of today's Zacks Rank #1 (Strong Buy) stocks here >>>>
Therefore, it could be wise to take the Buy-equivalent ABR for Builders FirstSource with a grain of salt.
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Builders FirstSource, Inc. (BLDR) : Free Stock Analysis Report
