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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 Gilead Sciences (GILD) before we discuss the reliability of brokerage recommendations and how to use them to your advantage.

Gilead currently has an average brokerage recommendation (ABR) of 1.96, 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 1.96 approximates between Strong Buy and Buy.

Of the 28 recommendations that derive the current ABR, 14 are Strong Buy and one is Buy. Strong Buy and Buy respectively account for 50% and 3.6% of all recommendations.

Brokerage Recommendation Trends for GILD

While the ABR calls for buying Gilead, 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.

Are you wondering why? The vested interest of brokerage firms in a stock they cover often results in a strong positive bias of their analysts in rating it. Our research shows that for every "Strong Sell" recommendation, brokerage firms assign five "Strong Buy" recommendations.

This means that the interests of these institutions are not always aligned with those of retail investors, giving little insight into the direction of a stock's future price movement. It would therefore 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.

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

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.

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.

There is also a key difference between the ABR and Zacks Rank when it comes to freshness. When you look at the ABR, it may not be up-to-date. Nonetheless, since brokerage analysts constantly revise their earnings estimates to reflect changing business trends, and their actions get reflected in the Zacks Rank quickly enough, it is always timely in predicting future stock prices.

Is GILD a Good Investment?

In terms of earnings estimate revisions for Gilead, the Zacks Consensus Estimate for the current year has increased 16.7% over the past month to $4.28.

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 Gilead. You can see the complete list of today's Zacks Rank #1 (Strong Buy) stocks here

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

Zacks Investment Research

Gilead Sciences (GILD) has been one of the most searched-for stocks on Zacks.com lately. So, you might want to look at some of the facts that could shape the stock's performance in the near term.

Over the past month, shares of this HIV and hepatitis C drugmaker have returned +6.8%, compared to the Zacks S&P 500 composite's +3.1% change. During this period, the Zacks Medical - Biomedical and Genetics industry, which Gilead falls in, has lost 1.9%. The key question now is: What could be the stock's future direction?

While media releases or rumors about a substantial change in a company's business prospects usually make its stock 'trending' and lead to an immediate price change, there are always some fundamental facts that eventually dominate the buy-and-hold decision-making.

Earnings Estimate Revisions

Here at Zacks, we prioritize appraising the change in the projection of a company's future earnings over anything else. That's because we believe the present value of its future stream of earnings is what determines the fair value for its stock.

We essentially look at how sell-side analysts covering the stock are revising their earnings estimates to reflect the impact of the latest business trends. And if earnings estimates go up for a company, the fair value for its stock goes up. A higher fair value than the current market price drives investors' interest in buying the stock, leading to its price moving higher. This is why empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

Gilead is expected to post earnings of $1.64 per share for the current quarter, representing a year-over-year change of -4.7%. Over the last 30 days, the Zacks Consensus Estimate has changed +2.7%.

The consensus earnings estimate of $4.28 for the current fiscal year indicates a year-over-year change of -36.3%. This estimate has changed +16.7% over the last 30 days.

For the next fiscal year, the consensus earnings estimate of $7.40 indicates a change of +72.8% from what Gilead is expected to report a year ago. Over the past month, the estimate has changed +1.8%.

With an impressive externally audited track record, our proprietary stock rating tool -- the Zacks Rank -- is a more conclusive indicator of a stock's near-term price performance, as it effectively harnesses the power of earnings estimate revisions. 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 Gilead.

The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:

12 Month EPS

Revenue Growth Forecast

While earnings growth is arguably the most superior indicator of a company's financial health, nothing happens as such if a business isn't able to grow its revenues. After all, it's nearly impossible for a company to increase its earnings for an extended period without increasing its revenues. So, it's important to know a company's potential revenue growth.

In the case of Gilead, the consensus sales estimate of $7.02 billion for the current quarter points to a year-over-year change of -1.3%. The $28.13 billion and $28.08 billion estimates for the current and next fiscal years indicate changes of +3.8% and -0.2%, respectively.

Last Reported Results and Surprise History

Gilead reported revenues of $7.55 billion in the last reported quarter, representing a year-over-year change of +7%. EPS of $2.02 for the same period compares with $2.29 a year ago.

Compared to the Zacks Consensus Estimate of $6.99 billion, the reported revenues represent a surprise of +7.94%. The EPS surprise was +27.85%.

Over the last four quarters, Gilead surpassed consensus EPS estimates three times. The company topped consensus revenue estimates each time over this period.

Valuation

No investment decision can be efficient without considering a stock's valuation. Whether a stock's current price rightly reflects the intrinsic value of the underlying business and the company's growth prospects is an essential determinant of its future price performance.

Comparing the current value of a company's valuation multiples, such as its price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), to its own historical values helps ascertain whether its stock is fairly valued, overvalued, or undervalued, whereas comparing the company relative to its peers on these parameters gives a good sense of how reasonable its stock price is.

As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional valuation metrics) organizes stocks into five groups ranging from A to F (A is better than B; B is better than C; and so on), making it helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.

Gilead is graded B on this front, indicating that it is trading at a discount to its peers. Click here to see the values of some of the valuation metrics that have driven this grade.

Bottom Line

The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about Gilead. However, its Zacks Rank #2 does suggest that it may outperform the broader market in the near term.

Zacks Investment Research

Shares of Avidity Biosciences RNA rose more than 12% on Wednesday after the company announced that it is expanding its current RNA-based pipeline of rare muscle disorders to explore a new therapeutic area — precision cardiology.

Avidity Enters the Cardio Space With Two New Drugs

The company has decided to advance two new wholly-owned pipeline drugs, AOC 1086 and AOC 1072, targeting two rare genetic cardiomyopathies, PLN cardiomyopathy and PRKAG2 syndrome, respectively.

There is currently no FDA-approved therapy for PLN cardiomyopathy and PRKAG2 syndrome, which are caused by mutations in the PLN and PRKAG2 genes, respectively. An excess build-up of these genes can lead to arrhythmias, sudden cardiac arrest, heart failure and other complications.

Per management, both AOC 1086 and AOC 1072 have been designed to address the root causes of the genetic diseases. Based on preclinical studies conducted by Avidity, both drugs have demonstrated robust delivery of siRNA (a type of RNA molecule) against targets in the heart and reduced the number of disease-causing genes by nearly 80%.

Avidity plans to present preclinical data from the AOC 1072 study at the American Heart Association Scientific Sessions 2024 on Nov. 16.

RNA Shares Glimpse of Innovations in RNA Space

Avidity also shared the first look at next-generation technology innovations in the RNA space, including modifications in siRNA delivery and advanced antibody engineering.

In preclinical studies, these advancements have shown up to a 30-fold increase in siRNA delivery to skeletal muscle and extended durability, achieving sustained target inhibition for three months. Based on these improvements, management believes that there is an opportunity to explore less frequent dosing options and enhance patient convenience.

RNA Stock Performance

Following the news, shares of Avidity hit an all-time high of $55.98. Wall Street has been paying a lot of attention to the stock, thanks to the impressive clinical performance of its rare muscle disorder pipeline. Per management, Avidity was the first company to successfully deliver siRNA to skeletal muscles. Preclinical studies showed that it has achieved a similar success against targets in the heart.

With this latest announcement, investors were likely impressed as the company is not just limiting itself to one segment but also exploring other medication areas like cardiology, which have shown immense commercial potential over the years.

Year to date, Avidity’s shares have skyrocketed 480% against the industry’s 3.8% decline.