Is It Worth Investing in AbbVie (ABBV) Based on Wall Street's Bullish Views?

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?

Let's take a look at what these Wall Street heavyweights have to say about AbbVie (ABBV) before we discuss the reliability of brokerage recommendations and how to use them to your advantage.

Invest in Gold

American Hartford Gold: #1 Precious Metals Dealer in the Nation

Priority Gold: Up to $15k in Free Silver + Zero Account Fees on Qualifying Purchase

Thor Metals Group: Best Overall Gold IRA

AbbVie currently has an average brokerage recommendation (ABR) of 1.84, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) made by 28 brokerage firms. An ABR of 1.84 approximates between Strong Buy and Buy.

Of the 28 recommendations that derive the current ABR, 15 are Strong Buy and two are Buy. Strong Buy and Buy respectively account for 53.6% and 7.1% of all recommendations.

Brokerage Recommendation Trends for ABBV

Check price target & stock forecast for AbbVie here>>>

While the ABR calls for buying AbbVie, 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.

Do you wonder why? As a result of the vested interest of brokerage firms in a stock they cover, their analysts tend to rate it with a strong positive bias. According to our research, brokerage firms assign five "Strong Buy" recommendations for every "Strong Sell" recommendation.

In other words, their interests aren't always aligned with retail investors, rarely indicating where the price of a stock could actually be heading. Therefore, the best use of this information could be validating your own research or an indicator that has proven to be highly successful in predicting a stock's price movement.

With an impressive externally audited track record, our proprietary stock rating tool, the Zacks Rank, which classifies 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. So, validating the Zacks Rank with ABR could go a long way in making a profitable investment decision.

Zacks Rank Should Not Be Confused With ABR

In spite of the fact that Zacks Rank and ABR both appear on a scale from 1 to 5, they are two completely different measures.

The ABR is calculated solely based on brokerage recommendations and is typically displayed with decimals (example: 1.28). In contrast, the Zacks Rank is a quantitative model allowing investors to harness the power of earnings estimate revisions. It is displayed in whole numbers -- 1 to 5.

It has been and continues to be the case that analysts employed by brokerage firms are overly optimistic with their recommendations. Because of their employers' vested interests, these analysts issue more favorable ratings than their research would support, misguiding investors far more often than helping 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 price movements.

Furthermore, the different grades of the Zacks Rank are applied proportionately across all stocks for which brokerage analysts provide earnings estimates for the current year. In other words, at all times, this tool maintains a balance among the five ranks it assigns.

Another key difference between the ABR and Zacks Rank is freshness. The ABR is not necessarily up-to-date when you look at it. But, since brokerage analysts keep revising their earnings estimates to account for a company's changing business trends, and their actions get reflected in the Zacks Rank quickly enough, it is always timely in indicating future price movements.

Is ABBV Worth Investing In?

In terms of earnings estimate revisions for AbbVie, the Zacks Consensus Estimate for the current year has remained unchanged over the past month at $12.28.

Analysts' steady views regarding the company's earnings prospects, as indicated by 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 size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #3 (Hold) for AbbVie. You can see the complete list of today's Zacks Rank #1 (Strong Buy) stocks here >>>>

It may therefore be prudent to be a little cautious with the Buy-equivalent ABR for AbbVie.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

AbbVie Inc. (ABBV) : Free Stock Analysis Report

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

Zacks Investment Research