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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 Zscaler (ZS) before we discuss the reliability of broker recommendations and how you can use them to your advantage.

Zscaler currently has an average brokerage recommendation (ABR) of 1.66 on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) of 38 brokerage firms. An ABR of 1.66 is roughly between Strong Buy and Buy.

Of the 38 recommendations that derive the current ABR, 25 are Strong Buy and one is Buy. Strong Buy and Buy account for 65.8% and 2.6% of all recommendations, respectively.

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

The ABR suggests buying Zscaler, 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 don’t always align with those of retail investors and rarely provide any indication of where a stock’s price might actually go. 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 ranking 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.

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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