Are analog devices (ADI) a buy if Wall Street analysts are optimistic?

When deciding to buy, sell or hold stocks, investors often rely on analyst recommendations. Media reports about ratings changes by brokerage (or sell-side) analysts often influence stock prices, but are they really important?

Let’s take a look at what these Wall Street heavyweights have to say Analog devices (ADI) before we discuss the reliability of broker recommendations and how to use them to your advantage.

Analog Devices currently has an Average Broker Recommendation (ABR) of 1.58 on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated from actual recommendations (Buy, Hold, Sell, etc.) from 19 brokerage firms. The ABR of 1.58 is roughly between a strong buy and a buy.

Of the 19 recommendations that determine the current ABR, 13 are “Strong Buy” and one is “Buy”. Strong Buy and Buy represent 68.4% and 5.3% of all recommendations, respectively.

Broker recommendation trends for ADI

Check price target and stock forecast for analog devices here>>>

While ABR urges you to purchase analog devices, it may not be wise to make an investment decision based solely on this information. Several studies have shown that brokerage firms’ recommendations for persuading investors to select stocks with the greatest price appreciation potential are limited or non-existent.

Are you wondering why? Due to brokerage firms’ vested interest in the stocks they cover, their analysts tend to rate them with a strong positive bias. Our research shows that brokerages assign five “Decide Buy” recommendations for each “Decide Sell” recommendation.

This means that the interests of these institutions are not always aligned with those of retail investors, providing little insight into the direction of future share price movements. Therefore, it would be best to use this information to check your own analysis or a tool that has proven to be very effective in predicting stock price movements.

With an impressive third-party audited track record, our proprietary Zacks Rank tool, which ranks stocks into five groups ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), is a reliable indicator of near-term stock price performance. So, verifying the Zacks Rank using ABR can greatly help you make a profitable investment decision.

Zacks Rank should not be confused with ABR

While both Zacks Rank and ABR are displayed in a range of 1-5, they are completely different measures.

Broker recommendations are the only basis for calculating ABR, which is usually displayed in decimal form (e.g. 1.28). On the other hand, the Zacks Rank is a quantitative model designed to leverage the strength of earnings estimate revisions. It is displayed in integers – from 1 to 5.

It has happened and still happens that analysts employed in brokerage houses are too optimistic about recommendations. Due to the particular interests of their employers, these analysts give more favorable assessments than their research would suggest, misleading investors much more often than helping them.

The Zacks Rank, on the other hand, is based on earnings estimate revisions. Empirical research shows that near-term stock movements are highly correlated with trends in earnings estimate revisions.

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

Another key difference between ABR and Zacks Rank is freshness. The ABR review is not necessarily up to date. However, because brokerage analysts continually update their earnings estimates to reflect a company’s changing business trends, and because their actions are reflected in the Zacks Rank quickly enough, they are always able to provide an indication of future price movements.

Is it worth investing in ADI?

Looking at Analog Devices’ earnings estimate revisions, the Zacks Consensus Estimate for the current year remained unchanged over the past month at $10.60.

Analysts’ stable views on the company’s earnings prospects, as indicated by consistent estimates, could be a valid reason for the company’s stock to perform similarly to the broader market in the near future.

The magnitude of the recent consensus change, along with three other earnings estimate factors, resulted in a Zacks Rank #3 (Hold) for Analog. You can see the complete list of today’s Zacks #1 (Strong Buy) stocks here >>>>

Therefore, it may be wise to exercise some caution when purchasing an ABR equivalent for analog devices.

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