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Find Great Stocks to Buy for Q3 and Beyond Using New Analyst Coverage

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The S&P 500 and the Nasdaq both notched records again on Tuesday on small moves higher. Both the indexes have raced to new highs to end the second quarter, with the tech-heavy index up roughly 12% since May 12.

Wall Street has taken nearly every chance over the past year to buy tech stocks on the dip. The Nasdaq’s resilience highlights the enormous and growing role technology plays in nearly every aspect of the economy and our lives. The recent run has pushed Facebook , Adobe (ADBE - Free Report) , Microsoft (MSFT - Free Report) , and many other giants to new highs as the market moves into the third quarter.

Bullish investors have pushed stocks to new levels amid the low volume summer months despite inflation worries and the possibility of higher interest rates. The ability to look beyond rising prices amid the booming U.S. economy could mean Wall Street knows TINA investing won’t end anytime soon, with rates set to remain historically low even when the Fed begins to lift them.

Furthermore, the U.S. economy continues its recovery. Plus, the S&P 500 earnings picture has climbed and it’s poised to improve as more second quarter results roll in.

Despite the positives and the fact that major U.S. indexes continue to march higher, some investors might be nervous about buying stocks with the market at highs. However, the last 16 months have showcased how difficult it is to time the market. And trying to do so can lead to buying high and selling low.

Therefore, investors with long-term horizons should try their best to stay constantly exposed to the market. One way to find potential winners is to search for companies that have landed new analyst coverage recently, especially as we get closer to the unofficial start of earnings season…

 

Zacks Investment ResearchImage Source: Zacks Investment Research

 

New Analyst Coverage

Broker recommendations play their part no matter how investors feel about them. And we seemingly all take a look no matter what. Individual investors, large institutional portfolio managers, and everyone in between are likely pleased to see one of their stocks get an upgraded rating or a new analyst cover the company.

Investor interest can generate more analyst coverage. This helps explain why analysts jump on young, much-hyped and talked about tech companies. Then, as new coverage is initiated, the company and the stock become more visible, which in turn often leads to more demand potential and therefore the possibility of higher prices. 

Plus, analysts almost always initiate coverage with a positive recommendation. And the logic follows because why spend all the time and write a research report on a company not widely tracked only to say it’s not good?

When it comes to companies with little to no analyst coverage, 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 search for companies with analyst coverage that has increased over the last 4 weeks. We just look at the number of analyst recommendations today and compare it to the number of analyst recommendations 4 weeks ago.

The rule of thumb here is that an increase in coverage leans bullish and a decrease signals bearish behavior. It is also worth pointing out that, in general, the change in the average broker recommendation is a better indicator than the actual recommendation itself.

On top of that, it is typically more bullish if the increase went from none to one or if the coverage was minimal to begin with. (As the number of analysts climbs the addition of new coverage isn’t earth-shattering.) In the end, increased coverage is still better than decreased coverage, unless the coverage is heading in the wrong direction. 

Now let’s try this screen…

• Number of Broker Ratings now greater than the Number of Broker Ratings four weeks ago

(This shows stocks where new coverage has recently been added.)

• Average Broker Rating less than Average Broker Rating four weeks ago

(By 'less than', we mean 'better than' four weeks ago.)

• Prices greater than or equal to 5

(We’re applying all of the above parameters to stocks above $5 a share since many money managers won't even look at stocks under $5)

• Average Daily Volume greater than or equal to 100,000 shares

(If there's not enough volume, even individual investors won't want it).

Here are three of the nearly 20 stocks that came through the screen this week…

Marathon Digital Holdings, Inc. (MARA - Free Report) - (from 2 analysts four weeks ago to 3)

Vimeo, Inc. (VMEO - Free Report) - (from 2 analysts four weeks ago to 5)

The Lion Electric Company (LEV - Free Report) - (from 2 analysts four weeks ago to 3)

Many 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. But you can with the Research Wizard. And you can backtest it all. Find out how to pick the right stocks right now by taking a free trial to the Research Wizard stock picking and backtesting program.

Click here to sign up for a free trial to the Research Wizard today.

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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.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.

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