New Analyst Coverage

I'm not a big fan of Broker Recommendations. This is largely because of their overwhelmingly bullish bias.

But Broker Recommendations do have their place. From small individual investors to large institutional portfolio mangers, people do pay attention to broker recommendations. (Although I should note, that in general, the changes in the average broker recommendation is a better indicator than the actual recommendation itself.)

Today I want to talk about companies that receive new analyst coverage.

One of the things that generate analyst coverage is investor interest. And as new coverage is initiated, it becomes more visible, which in turn means potentially more demand (read higher prices).

This is often the case because analysts almost always initiate coverage with a positive recommendation. (Why write a research report on a company not widely followed only to say it stinks?)

And when it comes to companies with little to no analyst coverage, that one new recommendation can sometimes give portfolio managers the validation they need to build a position. (And the more money they can invest, the more they can potentially influence prices.)

The best way to use this information is to look for companies with analyst coverage that has increased over the last four weeks.

Look at the number of analyst recommendations now in comparison to the number of analyst recommendations four weeks ago. An increase in coverage is bullish whereas a decrease in coverage is bearish.

It's typically more bullish if the increase went from none to one or if the coverage was minimal to begin with. (Going from 25 to 26 isn't going to have the same impact because that 26th analyst isn't discovering something 'new'.) But increased coverage is better than decreased coverage –- assuming the coverage is positive of course.

Here is a screen to try:

• Number of Broker Ratings four weeks ago
  (No more than five analysts were covering the stock four weeks ago.)

• Number of Broker Ratings now >= 6
  (There are at least six analysts covering the stock now.)

• Average Broker Rating
  (By '
• Average Broker Rating
  (I'm not that concerned about the rating itself. But since analyst recommendations tend to be bullishly biased, I'd prefer to not have them be 'bearish'.)

And for good measure ...

• % Change in Q(1) Estimates >= 0 and ...
  
• % Change in F(1) Estimates >= 0
  (Companies that receive upward estimate revisions have a tendency of receiving even more upward estimate revisions. This, in combination with the stock's increased visibility due to 'new' coverage, can be quite powerful.)

• And I'm applying all of the above parameters to stocks with Prices >= 5 (most money managers won't even look at a stock under $5) and Average Daily Volume >= 50,000 shares (if there's not enough volume, even individual investors won't want it).

Here are three stocks from this week's list (5/20/08):

CXG - Snapshot Report CNX Gas Corp.
FWLT - Analyst Report Foster Wheeler, Ltd.
ITRN - Snapshot Report Ituran Location and Control, Ltd.

Get the rest of the stocks on this list and see what new stocks the analysts are talking about. And don't stop there. Try finding companies with no coverage four weeks ago that are finally being looked at today.

Most screeners won't let you search for the number of analysts covering a stock, let alone comparing the amount of coverage they had weeks or even months ago. The same goes for changes in the Average Broker Rating and Estimate Revisions. But the Research Wizard allows you to do all this, and backtesting it all. Find out how to pick the right stocks right now by learning more about our free trial to the Research Wizard stock -picking and backtesting program.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.