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Many investors have immense faith in research done by analysts as they fear that lack of information might trigger inefficiencies. Here, analysts play a vital intermediary role with their extensive access to relevant data.
Coverage initiation of a stock by analyst(s) usually portrays higher investor inclination. Investors, on their part, often assume there is something special in a stock to attract analysts’ attention. In other words, they believe that the company coming under the microscope definitely has some value.
Obviously, stocks are not randomly chosen to cover. 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.
It is needless to say, the average change in broker recommendation is preferred over a single recommendation change.
Influence on Stock Price
The price movement of a stock is generally a function of the recommendations on it from 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).
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:
Price greater than or equal to $5 (as a stock below $5 will not likely create significant interest for most 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 five of the 14 stocks that passed the screen:
DXP Enterprises, Inc. (DXPE - Free Report) supplies maintenance, repair and operating products, equipment and services to industrial customers. Over the last 60 days, the Zacks Consensus Estimate for the company rose 240.9% to 75 cents for 2017 and 30.2% to $1.20 for 2018. Positive earnings estimate revisions for 2017 and 2018, along with an expected earnings growth rate of 20% for the next five years indicate the stock’s potential for further price appreciation. This Zacks Rank #2 (Buy) stock climbed 161.5% in the last one year, faring much better than the Zacks calssified Machinery-General Industrial industry’s addition of 28.6%.
LAKELAND BANCORP INC. (LBAI - Free Report) , a bank holding company engaged in general banking business, has rallied 62.5% in the last one year, outperforming the Zacks classified Banks-Northeast industry’s 23.8% gain. The Zacks Rank #2 stock saw positive earnings estimate revision of 3 cents for this year over the past 30 days, with an expected growth rate of 6.4%.
ServisFirst Bancshares Inc. (SFBS - Free Report) , a bank holding company, beat earnings estimates in each of the trailing four quarters, with an average beat ratio of 7.64%. Notably, the stock has climbed 32.9% in the last one year, better than the Zacks Finance-Savings & Loan industry’s 16.8% gain. This Zacks Rank #2 stock saw positive earnings estimate revision of 6% for this year and 4.7% for the next over the past 60 days.
First American Financial Corporation (FAF - Free Report) provides financial services through its Title Insurance and Services and Specialty Insurance segments. This is a Zacks Rank #1 (Strong Buy) stock has rallied 17.3% so far this year, outperforming the Zacks categorized Insurance-Prop & Casualty industry’s 2.5% increase. You can see the complete list of today’s Zacks #1 Rank stocks here.
Meanwhile, estimates for the current year and the next have moved up by 13.1% and 11.7% over the last 60 days. It has a 3-5 year expected EPS growth rate of 13%.
RTI Surgical Inc. , a surgical implant company, is expected to witness 75% EPS growth in the current year and 78.6% in the next. The Zacks Rank #3 (Hold) stock has gained 38.4% in the last one year, outperforming the Zacks classified Medical Instruments industry’s 11.4% gain. It has a solid 3-5 year expected EPS growth rate of 15%.
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.
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 »
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5 Stocks Set to Soar on New Analyst Coverage
Many investors have immense faith in research done by analysts as they fear that lack of information might trigger inefficiencies. Here, analysts play a vital intermediary role with their extensive access to relevant data.
Coverage initiation of a stock by analyst(s) usually portrays higher investor inclination. Investors, on their part, often assume there is something special in a stock to attract analysts’ attention. In other words, they believe that the company coming under the microscope definitely has some value.
Obviously, stocks are not randomly chosen to cover. 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.
It is needless to say, the average change in broker recommendation is preferred over a single recommendation change.
Influence on Stock Price
The price movement of a stock is generally a function of the recommendations on it from 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).
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:
Price greater than or equal to $5 (as a stock below $5 will not likely create significant interest for most 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 five of the 14 stocks that passed the screen:
DXP Enterprises, Inc. (DXPE - Free Report) supplies maintenance, repair and operating products, equipment and services to industrial customers. Over the last 60 days, the Zacks Consensus Estimate for the company rose 240.9% to 75 cents for 2017 and 30.2% to $1.20 for 2018. Positive earnings estimate revisions for 2017 and 2018, along with an expected earnings growth rate of 20% for the next five years indicate the stock’s potential for further price appreciation. This Zacks Rank #2 (Buy) stock climbed 161.5% in the last one year, faring much better than the Zacks calssified Machinery-General Industrial industry’s addition of 28.6%.
LAKELAND BANCORP INC. (LBAI - Free Report) , a bank holding company engaged in general banking business, has rallied 62.5% in the last one year, outperforming the Zacks classified Banks-Northeast industry’s 23.8% gain. The Zacks Rank #2 stock saw positive earnings estimate revision of 3 cents for this year over the past 30 days, with an expected growth rate of 6.4%.
ServisFirst Bancshares Inc. (SFBS - Free Report) , a bank holding company, beat earnings estimates in each of the trailing four quarters, with an average beat ratio of 7.64%. Notably, the stock has climbed 32.9% in the last one year, better than the Zacks Finance-Savings & Loan industry’s 16.8% gain. This Zacks Rank #2 stock saw positive earnings estimate revision of 6% for this year and 4.7% for the next over the past 60 days.
First American Financial Corporation (FAF - Free Report) provides financial services through its Title Insurance and Services and Specialty Insurance segments. This is a Zacks Rank #1 (Strong Buy) stock has rallied 17.3% so far this year, outperforming the Zacks categorized Insurance-Prop & Casualty industry’s 2.5% increase. You can see the complete list of today’s Zacks #1 Rank stocks here.
Meanwhile, estimates for the current year and the next have moved up by 13.1% and 11.7% over the last 60 days. It has a 3-5 year expected EPS growth rate of 13%.
RTI Surgical Inc. , a surgical implant company, is expected to witness 75% EPS growth in the current year and 78.6% in the next. The Zacks Rank #3 (Hold) stock has gained 38.4% in the last one year, outperforming the Zacks classified Medical Instruments industry’s 11.4% gain. It has a solid 3-5 year expected EPS growth rate of 15%.
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 »