Is Alibaba (BABA) a Buy as Wall Street Analysts Are Bullish?

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?

Let's take a look at what these Wall Street heavyweights have to say Alibaba (BABA) before we discuss the reliability of broker recommendations and how you can use them to your advantage.

Alibaba currently has an average broker recommendation (ABR) of 1.35 on a scale of 1 to 5 (strong buy to strong sell), calculated based on the actual recommendations (buy, hold, sell, etc.) from 17 brokerage firms. An ABR of 1.35 is roughly between Strong Buy and Buy.

Of the 17 recommendations that derive the current ABR, 14 are Strong Buys, representing 82.4% of all recommendations.

Brokerage recommendation trends for BABA

Price target and stock forecast for Alibaba can be found here>>>

The ABR suggests buying Alibaba, but making an investment decision based on this information alone may not be a good idea. According to several studies, broker recommendations have little to no success in helping investors select stocks with the greatest potential for price appreciation.

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.

Zacks Rank, our proprietary stock rating tool with an impressive, outside-audited track record, categorizes stocks into five groups ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell) and is an effective indicator of a company's performance Share price development in the near future. Therefore, using the ABR to validate the Zacks Rank could be an efficient way to make a profitable investment decision.

Zack's rank should not be confused with ABR

Although both the Zacks Rank and ABR are displayed in a range of 1 to 5, they are different measures overall.

Broker recommendations are the only basis for calculating ABR, which is usually shown in decimal numbers (e.g. 1.28). The Zacks Rank, on the other hand, is a quantitative model that is designed 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.

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 movements.

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 BABA a good investment?

When it comes to earnings estimate revisions for Alibaba, the Zacks Consensus Estimate for the current year remained unchanged at $8.68 last month.

Analysts' consistent views on the company's earnings outlook, as reflected in an unchanged consensus estimate, could be a legitimate reason for the stock to perform in line with the broader market in the near term.

The magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, have resulted in Alibaba earning a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here >>>>

It may therefore be advisable to be a little cautious with the Buy Equivalent ABR for Alibaba.

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