Microsoft (MSFT) Is Considered a Good Investment by Brokers: Is That True?

Investors often rely on the recommendations of Wall Street analysts when deciding whether to buy, sell or hold a stock. Media reports of rating changes from these analysts employed by brokerage (or sell-side) firms often affect a stock’s price. But are they really important?

Let’s take a look at what these Wall Street heavyweights have to say about it. Microsoft $MSFT (MSFT) before discussing the reliability of brokerage recommendations and how to use them to your advantage.

Microsoft currently has an average brokerage recommendation (ABR) of 1.24, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on actual recommendations (Buy, Hold, Sell, etc.) made by 50 brokerage firms. An ABR of 1.24 is close to a strong buy and a buy.

Of the 50 recommendations that derive from the current ABR, 42 are strong buys and four are buys. Strong Buy and Buy represent 84% and 8% of all recommendations, respectively.

Brokerage Recommendation Trends for MSFT

Check price target and stock forecast for Microsoft here>>>

While the ABR calls for buying Microsoftit may not be wise to make an investment decision based solely on this information. Several studies have shown limited to no success of broker recommendations in guiding investors in selecting stocks with the best price upside potential.

Are you wondering why? Brokerage firms’ vested interest in a stock they cover often results in a strong positive bias from their analysts in their rating. Our research shows that for every “Strong Sell” recommendation, brokerages assign five “Strong Buy” recommendations.

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

Backed by an impressive outside-audited track record, our proprietary stock rating tool, the Zacks Rank, which ranks 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. Thus, validating the Zacks Rank with ABR could go a long way in making a profitable investment decision.

The Zacks Rank should not be confused with ABR

Although the Zacks Rank and ABR are displayed in a range of 1 to 5, they are entirely different metrics.

The ABR is calculated based solely on brokerage recommendations and is generally displayed with decimal places (example: 1.28). In contrast, the Zacks Rank is a quantitative model that allows investors to harness the power of earnings estimate revisions. It is displayed in whole numbers – from 1 to 5.

Analysts employed by brokerage firms have been and continue to be overly optimistic in their recommendations. Because the ratings issued by these analysts are more favorable than their research would allow due to the vested interests of their employers, they mislead investors far more often than they guided them.

In contrast, the Zacks Rank is driven by earnings estimate revisions. And near-term stock price movements are strongly correlated with trends in earnings estimate revisions, empirical research shows.

Additionally, the various Zacks Rank ratings are applied proportionately to all stocks for which the brokerage analysts provide current year earnings estimates. In other words, this tool always maintains a balance between its five ranks.

Another key difference between the ABR and the Zacks Rank is freshness. The ABR is not necessarily up to date when consulted. But, since brokerage analysts continue to revise their earnings estimates to reflect changing business trends of a company and their stocks are reflected in the Zacks Rank fairly quickly, it is always timely to indicate future price movements.

Should you invest in MSFT?

Looking at earnings estimate revisions for Microsoftthe Zacks Consensus Estimate for the current year has increased 0.4% over the past month to $17.1.

Analysts’ growing optimism about the company’s earnings prospects, as indicated by the strong agreement among them on upward revision of EPS estimates, could be a legitimate reason for the stock to soar in the near term.

The magnitude of the recent change in the consensus estimate, along with three other factors related to earnings estimates, resulted in a Zacks Rank #2 (Buy) for Microsoft. You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>

Therefore, the ABR is equivalent to buying for Microsoft can serve as a useful guide for investors.

5 stocks expected to double

Each has been hand-picked by a Zacks expert as the favorite stock to gain +100% or more in the months to come. They understand

Action #1: A disruptive force with notable growth and resilience

Action #2: Bullish Signs Signaling Buying the Dip

Stock #3: one of the most interesting investments on the market

Action #4: Leader in a booming sector ready for growth

Stock #5: Modern Omnichannel Platform Rolled Up in Spring

Many of the stocks featured in this report fly under Wall Street’s radar, providing a great opportunity to get in front of the world. While not every pick can be a winner, previous recommendations have climbed +171%, +209%, and +232%.

Check out our latest 5 stocks ready to double down on their picks >>

Want the latest recommendations from Zacks Investment Research? Today you can download the 7 best stocks for the next 30 days. Click to get this free report

Microsoft Corporation (MSFT): Free Stock Analysis Report

This article was originally published on Zacks Investment Research (zacks.com).

Zacks Investing Research