Is Novo Nordisk (NVO) a buy as Wall Street analysts remain optimistic?

Investors often look to the recommendations of Wall Street analysts before making a buy, sell, or hold decision on a stock. Media reports of rating changes by these brokerage firm (or sell-side) analysts often affect the stock price, but do they really matter?

Let’s take a look at what these Wall Street heavyweights have to say about Novo Nordisk (NVO) before we discuss the reliability of broker recommendations and how to use them to your advantage.

Novo Nordisk currently has an average broker recommendation (ABR) of 1.46 on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) of 12 brokerage firms. An ABR of 1.46 is roughly between Strong Buy and Buy.

Of the 12 recommendations that make up the current ABR, nine are “Strong Buy” and one is “Buy”. 75% and 8.3% of all recommendations are “Strong Buy”.

Brokerage recommendation trends for NVO

Check the price target and stock forecast for Novo Nordisk here>>>

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

Wondering why? Brokerage firms' vested interest in a stock they cover often leads their analysts to give that stock a strong positive rating. Our research shows that for every “Strong Sell” recommendation, brokerage firms give five “Strong Buy” recommendations.

This means that the interests of these institutions do not always align with those of retail investors and therefore provide little insight into the direction of a stock's future price movement. Therefore, it would be best to use this information to validate your own analysis or a tool that has proven to be highly effective at predicting stock price movements.

With an impressive, outside-audited track record, our proprietary stock evaluation tool, the Zacks Rank, which categorizes 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. Validating the Zacks Rank with ABR can therefore go a long way in making a profitable investment decision.

Zacks Rank should not be confused with ABR

Although both the Zacks Rank and ABR are displayed in a range of 1-5, they are completely different metrics.

The ABR is calculated based solely on broker recommendations and is typically displayed with decimals (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 – 1 through 5.

The story continues

It has always been, and still is, the case that brokerage firm analysts are overly optimistic in their recommendations. Due to the self-interest of their employers, these analysts give more favorable ratings than their research would justify, and in doing so, mislead investors far more often than they help 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, according to empirical research.

In addition, the various Zacks Ranks are proportionally applied to all stocks for which brokerage analysts provide earnings estimates for the current year. In other words, this tool always maintains a balance among its five ranks.

There is also a key difference between the ABR and the Zacks Rank when it comes to timeliness. When you look at the ABR, it may not be up to date. However, since broker analysts are constantly revising their earnings estimates to reflect changing business trends and their actions are reflected in the Zacks Rank quickly enough, it is always up to date in predicting future stock prices.

Is it worth investing in NVO?

Looking at earnings estimate revisions for Novo Nordisk, the Zacks Consensus Estimate for the current year remained unchanged at $3.11 within the past month.

Analysts' stable assessments of the company's earnings prospects, reflected in an unchanged consensus estimate, could be a legitimate reason for the stock to perform in line with the overall market in the near future.

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

It may therefore be advisable to be a little cautious when purchasing equivalent ABR for Novo Nordisk.

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