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Do analysts create value for companies by initiating coverage? Of course they do because they play an important intermediary role with their extensive access to relevant data. Many investors have a deep trust in the research work done by analysts as they fear that a lack of information while researching on their own might trigger inefficiencies.
Coverage initiation of a stock by analyst(s) usually portrays bigger investor inclination. Investors, on their part, often assume there is something special in a stock to attract analysts to cover it. In other words, they believe that the company coming under the microscope definitely has some value.
Obviously, stocks are not randomly chosen to cover. A new coverage on a stock usually reflects a reassuring future envisioned by the analyst(s). At times, increased investors’ focus on a stock motivates analysts to take a closer look at it. After all, who doesn’t love to produce something that is already in demand? Hence, we often find that analysts’ ratings on newly added stocks are more favorable than their ratings on continuously covered stocks.
Needless to say, the average change in broker recommendation is more preferable than a single recommendation change.
Influence of Analyst Coverage on Stock Price
The price movement of a stock is generally a function of the recommendations on it from the new analysts. Stocks typically see an upward price movement with a new analyst coverage compared to what they witness with a rating upgrade under an existing coverage. Positive recommendations – Buy and Strong Buy – generally lead to a significantly positive price reaction than Hold recommendations. On the contrary, analysts hardly initiate coverage with a Strong Sell or Sell recommendation.
Now, if an analyst gives a new recommendation on a company that has very few or no existing coverage, investors start paying more attention to it. Also, any new information attracts portfolio managers to build a position in the stock.
So, it’s a good strategy to bet on stocks that have seen increased analyst coverage over the last few weeks.
Screening Criteria
Number of Broker Ratings now greater than the Number of Broker Ratings four weeks ago (This will shortlist stocks that have recent new coverage.)
Average Broker Rating less than Average Broker Rating four weeks ago ('Less than' means 'better than' four weeks ago.)
The number of increased analyst coverage and improving average rating are the primary criteria of this strategy, but one should consider other relevant parameters to make the strategy foolproof. Here are the other screening parameters:
Prices greater than or equal to 5 (as a stock below $5 will not likely create significant interest for most of the investors)
Average Daily Volume greater than or equal to 100,000 shares (if volume isn’t enough, it will not attract individual investors).
Here are 5 of the 11 stocks that passed the screen:
GCP Applied Technologies Inc. provides specialty construction chemicals and building materials as well as packaging technologies. This company was launched in Feb 2016. It’s first-quarter gross margin registered solid growth of 380 basis points. Its estimated 5-year earnings growth rate of 11.5% shows promise.
Vascular Solutions Inc. offers the Vascular Solutions Duett sealing device which allows cardiologists and radiologists to rapidly seal the puncture site following catheterization procedures such as angiography, angioplasty and stenting. The company’s second-quarter 2016 earnings improved 13.8% and revenues grew 10% year over year. It remains on track to deliver the 13th consecutive year of better than 10% revenue growth.
The company’s strong pipeline of products (40 new ideas at various stages of development), solid growth prospects for most of the existing products and improved manufacturing efficiencies are expected to drive substantial growth. The company’s solid return profile and estimated 5-year earnings growth rate of 20% are impressive.
Based in Vancouver, Canada, Silver Standard Resources Inc. engages in the acquisition, exploration, development, and operation of precious metal resource properties in the Americas. Silver Standard’s shares have gone up over 150% year to date. In June, Silver Standard closed the buyout of Claude Resources Inc. The acquisition will lead to an increase in cash flow generation, improved credit quality and better financial flexibility.
Energy Recovery, Inc. (ERII - Free Report) is a San Leandro, CA-based leading firm from the pollution control industry. The company manufactures devices that transform untapped energy into reusable energy from industrial fluid flows and pressure cycles. The company’s shares have jumped more than 52% year to date. It also has an impressive return profile with estimated 5-year earnings growth rate of 9%.
Colony Starwood Homes is a leading single-family rental real estate investment trust (“REIT”). This company closed the $7.7 billion merger between Starwood Waypoint Residential Trust and Colony American Homes earlier this year, creating the premier single-family REIT.
By integrating these two leading organizations, with over 30,000 homes concentrated in its top 10 markets, the company expects to unlock strategic and operational benefits. The company’s share price climbed over 40% year to date and it has an estimated 5-year earnings growth rate of 10%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out. Click here to sign up for a free trial to the Research Wizard today.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
Unique Zacks Analysis of Your Chosen Ticker
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5 Stocks Set to Rise on New Analyst Coverage
Do analysts create value for companies by initiating coverage? Of course they do because they play an important intermediary role with their extensive access to relevant data. Many investors have a deep trust in the research work done by analysts as they fear that a lack of information while researching on their own might trigger inefficiencies.
Coverage initiation of a stock by analyst(s) usually portrays bigger investor inclination. Investors, on their part, often assume there is something special in a stock to attract analysts to cover it. In other words, they believe that the company coming under the microscope definitely has some value.
Obviously, stocks are not randomly chosen to cover. A new coverage on a stock usually reflects a reassuring future envisioned by the analyst(s). At times, increased investors’ focus on a stock motivates analysts to take a closer look at it. After all, who doesn’t love to produce something that is already in demand? Hence, we often find that analysts’ ratings on newly added stocks are more favorable than their ratings on continuously covered stocks.
Needless to say, the average change in broker recommendation is more preferable than a single recommendation change.
Influence of Analyst Coverage on Stock Price
The price movement of a stock is generally a function of the recommendations on it from the new analysts. Stocks typically see an upward price movement with a new analyst coverage compared to what they witness with a rating upgrade under an existing coverage. Positive recommendations – Buy and Strong Buy – generally lead to a significantly positive price reaction than Hold recommendations. On the contrary, analysts hardly initiate coverage with a Strong Sell or Sell recommendation.
Now, if an analyst gives a new recommendation on a company that has very few or no existing coverage, investors start paying more attention to it. Also, any new information attracts portfolio managers to build a position in the stock.
So, it’s a good strategy to bet on stocks that have seen increased analyst coverage over the last few weeks.
Screening Criteria
Number of Broker Ratings now greater than the Number of Broker Ratings four weeks ago (This will shortlist stocks that have recent new coverage.)
Average Broker Rating less than Average Broker Rating four weeks ago ('Less than' means 'better than' four weeks ago.)
The number of increased analyst coverage and improving average rating are the primary criteria of this strategy, but one should consider other relevant parameters to make the strategy foolproof. Here are the other screening parameters:
Prices greater than or equal to 5 (as a stock below $5 will not likely create significant interest for most of the investors)
Average Daily Volume greater than or equal to 100,000 shares (if volume isn’t enough, it will not attract individual investors).
Here are 5 of the 11 stocks that passed the screen:
GCP Applied Technologies Inc. provides specialty construction chemicals and building materials as well as packaging technologies. This company was launched in Feb 2016. It’s first-quarter gross margin registered solid growth of 380 basis points. Its estimated 5-year earnings growth rate of 11.5% shows promise.
Vascular Solutions Inc. offers the Vascular Solutions Duett sealing device which allows cardiologists and radiologists to rapidly seal the puncture site following catheterization procedures such as angiography, angioplasty and stenting. The company’s second-quarter 2016 earnings improved 13.8% and revenues grew 10% year over year. It remains on track to deliver the 13th consecutive year of better than 10% revenue growth.
The company’s strong pipeline of products (40 new ideas at various stages of development), solid growth prospects for most of the existing products and improved manufacturing efficiencies are expected to drive substantial growth. The company’s solid return profile and estimated 5-year earnings growth rate of 20% are impressive.
Based in Vancouver, Canada, Silver Standard Resources Inc. engages in the acquisition, exploration, development, and operation of precious metal resource properties in the Americas. Silver Standard’s shares have gone up over 150% year to date. In June, Silver Standard closed the buyout of Claude Resources Inc. The acquisition will lead to an increase in cash flow generation, improved credit quality and better financial flexibility.
Energy Recovery, Inc. (ERII - Free Report) is a San Leandro, CA-based leading firm from the pollution control industry. The company manufactures devices that transform untapped energy into reusable energy from industrial fluid flows and pressure cycles. The company’s shares have jumped more than 52% year to date. It also has an impressive return profile with estimated 5-year earnings growth rate of 9%.
Colony Starwood Homes is a leading single-family rental real estate investment trust (“REIT”). This company closed the $7.7 billion merger between Starwood Waypoint Residential Trust and Colony American Homes earlier this year, creating the premier single-family REIT.
By integrating these two leading organizations, with over 30,000 homes concentrated in its top 10 markets, the company expects to unlock strategic and operational benefits. The company’s share price climbed over 40% year to date and it has an estimated 5-year earnings growth rate of 10%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »