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5 Stocks for Higher Returns as Analysts Initiate Coverage

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As analysts are the key information intermediaries in capital markets, initiation of coverage by them offers critical information on a stock, which is of great value to investors.

Coverage initiation by analyst(s) on a stock portrays higher investor inclination. Investors, on their part, often assume that there is something special in a stock that attracts analysts’ interest. In other words, they believe that the company coming under coverage has value that can’t be ignored.

Obviously, stocks are not randomly chosen to cover. New coverage 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 ratings on continuously covered stocks.

It is worth mentioning here that the average change in broker recommendation is always preferred over a single recommendation change.

New Analyst Coverage & Impact on Price Movement

The price movement of a stock is the function of the recommendations on it from new analysts. Typically, stocks see an upward price movement on new analyst coverage compared to what was witnessed 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.

Meanwhile, investors start paying more attention to the stock (that has very few or no existing coverage) on which an analyst provides a new recommendation. Also, any new information attracts portfolio managers to build a position in the stock.

Below, we have selected five stocks that have seen increased analyst coverage over the past 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 also consider other relevant parameters to make it 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 19 stocks that passed the screen:

Alpha and Omega Semiconductor Limited (AOSL - Free Report) : This Sunnyvale, CA-based company designs, develops, and supplies power semiconductor products. This Zacks Rank #1 (Strong Buy) stock has gained 42.2% so far this year compared with the industry’s 17.1% growth. Earnings estimates for the current year have moved up 19.2% over the past 60 days. Its earnings are expected to grow 16.4% in 2021. You can see the complete list of today’s Zacks #1 Rank stocks here.

Preferred Apartment Communities, Inc. (APTS - Free Report) : This real estate investment trust currently carries a Zacks Rank #2 (Buy). The stock has gained 64.4% so far this year compared with the industry’s 34.1% growth. Earnings estimates for the current year have moved up 100% over the past 60 days.

Hut 8 Mining Corp. (HUT - Free Report) : Headquartered in Toronto, Canada, it operates as a cryptocurrency mining company in North America. The stock, currently holding a Zacks Rank #2, has gained 121.4% over the past three months against the industry’s 27.3% decline. Earnings estimates for the current year have moved up 26.5% over the past 60 days.

GCM Grosvenor Inc. (GCMG - Free Report) : Based in Chicago, IL, this company is a global alternative asset management solutions provider. It currently carries a Zacks Rank #3 (Hold) and has gained 17.7% over the past three months, outperforming the industry’s 2.5% growth. Earnings estimates for the current year have moved up 7.5% over the past 60 days. The company’s earnings are expected to grow 16.3% in 2021.

Harmony Biosciences Holdings, Inc. (HRMY - Free Report) : Based in Plymouth Meeting, PA, this is a commercial-stage pharmaceutical company that currently carries a Zacks Rank #3. The stock has gained 5.5% year to date against the industry’s 1.4% decline. Earnings estimates for the current year have moved up 6.1% over the past 60 days. Its earnings are expected to grow 395.2% in 2021.

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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