There’s no denying that the lack of consistency in information creates inefficiencies that might result in misinterpretation of stocks. Initiation of coverage by analysts offers critical information on a stock which is of great value to investors.
Coverage initiation on a stock by analyst(s) usually depicts increased investor inclination. Investors, on their part, often assume that there is something in the stock that has attracted analyst attention. In other words, they believe that the company coming under the radar definitely has some value which can be tapped into. Obviously, stocks are not arbitrarily chosen to cover. New coverage on a stock usually reflects an encouraging future envisioned by the analyst(s). At times, increased investor focus on a stock motivates analysts to take a closer look at it. Needless to say, the average change in broker recommendation is preferred over a single recommendation change. How Does Analyst Coverage Influence 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 limited 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. Below, we have selected five 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 four of the eight stocks that passed the screen:
Perion Network Ltd. ( PERI Quick Quote PERI - Free Report) : Based Holon, Israel, this technology company currently flaunts a Zacks Rank #1 (Strong Buy). The company has gained 58.2% in the past six months versus its industry’s 16.4% rise. Its earnings estimates for fiscal 2020 have climbed 1,900% to 20 cents per share over the past 30 days. The company’s earnings have surpassed the consensus mark in the trailing four quarters, the average being 99.3%. You can see . the complete list of today’s Zacks #1 Rank stocks here Live Oak Bancshares, Inc. ( LOB Quick Quote LOB - Free Report) : This Wilmington, NC-based company operates as the bank holding company for Live Oak Banking Company. The stock currently carries a Zacks Rank #3 (Hold). It has gained 133.2% in the past six months versus its industry’s 23.9% rise. Its earnings estimates for 2020 have climbed 31.9% to 62 cents per share over the past 30 days. Earnings for the current year are expected to increase 40.9%. LexinFintech Holdings Ltd. ( LX Quick Quote LX - Free Report) : Headquartered in Shenzhen, the People's Republic of China, this company operates as an online consumer finance platform for young professionals. This Zacks Rank #3 company has lost 7.2% against the industry’s 57.5% rise over the past six months. Although the stock has underperformed its industry during the period, its earnings estimates for 2020 have climbed 7.6% over the past 30 days, depicting analyst optimism over the company’s earnings growth potential. The company’s trailing 12-month return on equity (ROE) is currently pegged at 18.5% versus the industry average of 14.9%. InMode Ltd. ( INMD Quick Quote INMD - Free Report) : Headquartered in Yokneam, Israel, this company is a provider of medical technologies. The stock currently carries a Zacks Rank #3. The company has gained 79.1% in the past six months versus its industry’s 8.4% rise. The company’s trailing 12-month return on equity (ROE) is currently pegged at 27.2% versus the industry average of a negative 9%. 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