When deciding whether to buy, sell, or hold a stock, investors often rely on analyst recommendations. Media reports about rating changes by these brokerage-firm-employed (or sell-side) analysts often influence a stock's price, but are they really important?
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 JD.com, Inc. (NASDAQ: JD).
JD.com currently has an average brokerage recommendation of 1.59, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) made by 17 brokerage firms. An ABR of 1.59 approximates between Strong Buy and Buy.
Of the 17 recommendations that derive the current ABR, 12 are Strong Buy, representing 70.6% of all recommendations.
Brokerage Recommendation Trends for JD
While the ABR calls for buying JD.com, it may not be wise to make an investment decision solely based on this information. Several studies have shown limited to no success of brokerage recommendations in guiding investors to pick stocks with the best price increase potential.
Are you wondering why? The vested interest of brokerage firms in a stock they cover often results in a strong positive bias of their analysts ...