Is Sterling Infrastructure (STRL) a Buy as Wall Street Analysts Look Optimistic?

The recommendations of Wall Street analysts are often relied on by investors when deciding whether to buy, sell, or hold a stock. Media reports about these brokerage-firm-employed (or sell-side) analysts changing their ratings often affect a stock's price. Do they really matter, though?

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

Sterling Infrastructure currently has an average brokerage recommendation (ABR) of 1.00, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) made by three brokerage firms. An ABR of 1.00 indicates Strong Buy.

Of the three recommendations that derive the current ABR, three are Strong Buy, representing 100% of all recommendations.

Brokerage Recommendation Trends for STRL

Check price target & stock forecast for Sterling Infrastructure here>>>

While the ABR calls for buying Sterling Infrastructure, 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.

ABR Should Not Be Confused With Zacks Rank

Although both Zacks Rank and ABR are displayed in a range of 1--5, they are different measures altogether.

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 STRL Worth Investing In?

In terms of earnings estimate revisions for Sterling Infrastructure, the Zacks Consensus Estimate for the current year has increased 8.8% over the past month to $8.9.

Analysts' growing optimism over the company's earnings prospects, as indicated by strong agreement among them in revising EPS estimates higher, could be a legitimate reason for the stock to soar 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 #2 (Buy) for Sterling Infrastructure. You can see the complete list of today's Zacks Rank #1 (Strong Buy) stocks here >>>>

Therefore, the Buy-equivalent ABR for Sterling Infrastructure may serve as a useful guide for investors.

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

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