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Wall Street Analysts Think NextEra (NEE) Is a Good Investment: Is It?

Investors often turn to recommendations made by Wall Street analysts before making a Buy, Sell, or Hold decision about a stock. While media reports about rating changes by these brokerage-firm employed (or sell-side) analysts often affect a stock's price, do they really matter?

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

NextEra currently has an average brokerage recommendation (ABR) of 1.65, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) made by 17 brokerage firms. An ABR of 1.65 approximates between Strong Buy and Buy.

Of the 17 recommendations that derive the current ABR, 12 are Strong Buy and one is Buy. Strong Buy and Buy respectively account for 70.6% and 5.9% of all recommendations.

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Brokerage Recommendation Trends for NEE

Broker Rating Breakdown Chart for NEE
Broker Rating Breakdown Chart for NEE



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

While the ABR calls for buying NextEra, 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.

Zacks Rank, our proprietary stock rating tool with an impressive externally audited track record, categorizes stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), and is an effective indicator of a stock's price performance in the near future. Therefore, using the ABR to validate the Zacks Rank could be an efficient way of making a profitable investment decision.

Zacks Rank Should Not Be Confused With ABR

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.

Analysts employed by brokerage firms have been and continue to be overly optimistic with their recommendations. Since the ratings issued by these analysts are more favorable than their research would support because of the vested interest of their employers, they mislead investors far more often than they guide.

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.

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 NEE Worth Investing In?

In terms of earnings estimate revisions for NextEra, the Zacks Consensus Estimate for the current year has remained unchanged over the past month at $3.44.

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 NextEra. 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 NextEra.

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NextEra Energy, Inc. (NEE) : Free Stock Analysis Report

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