Wall Street Analysts Think Cadence Is a Good Investment: Is It? – Cadence Design System (NASDAQ:CDNS)

Investors often rely on the recommendations of Wall Street analysts when deciding whether to buy, sell or hold a stock. Media reports about these brokerage firms' employed (or sell-side) analysts changing their ratings often affect the price of a stock. But do they really matter?

Before we look at the reliability of brokerage recommendations and how to use them to your advantage, let's see what these Wall Street heavyweights think. Cadence Design Systems CDNS.

Cadence currently has an average brokerage recommendation of 1.64, on a scale of 1 to 5 (strong buy to strong sell), calculated based on actual recommendations (buy, hold, sell, etc.) made by 14 brokerage firms. brokerage. An ABR of 1.64 is somewhere between Strong Buy and Buy.

Of the 14 recommendations derived from the current ABR, 10 are Strong Buy and one is Buy. Strong Buy and Buy respectively represent 71.4% and 7.1% of all recommendations.

Brokerage Recommendation Trends for CDNS

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

Do you wonder why? As a result of brokerage firms' vested interest 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 are not always aligned with those of retail investors and they rarely indicate where a stock's price might actually be headed. Therefore, the best use of this information might be to validate your own research or an indicator that has proven to be very successful in predicting the price movement of a stock.

The Zacks Rank, our proprietary stock rating tool with an impressive, outside-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 gauge of the level of a stock. price evolution in the near future. Therefore, using the ABR to validate the Zacks Rank could be an effective way to make a profitable investment decision.

ABR should not be confused with the Zacks Rank

Although both the Zacks Rank and ABR range from 1 to 5, they are completely different measures.

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 that allows investors to harness the power of earnings estimate revisions. Displayed in whole numbers: 1 to 5.

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

Conversely, 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.

Additionally, the different Zacks Rank grades are applied proportionally to all stocks for which brokerage analysts provide earnings estimates for the current year. That is, at all times this tool maintains a balance between the five ranges it assigns.

Another key difference between ABR and Zacks Rank is freshness. The ABR is not necessarily up to date when you look at it. But, since brokerage analysts continue to revise their earnings estimates to take into account a company's changing business trends, and its stocks are reflected in the Zacks Rank quickly enough, it is always timely to indicate future price movements.

Is it worth investing in CDNS?

In terms of earnings estimate revisions for Cadence, the Zacks Consensus Estimate for the current year has moved 0.1% lower over the past month to $5.88.

Analysts' growing pessimism about the company's earnings prospects, as indicated by the strong agreement among them to revise EPS estimates downward, could be a legitimate reason for the stock to slide in the near term.

The size of the recent consensus estimate change, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #4 (Sell) for Cadence.

Therefore, it might be wise to take the ABR equivalent of Cadence's purchase with a grain of salt.

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