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3 Stocks for Higher Returns as New 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 that is of great value to investors.

Terns Pharmaceuticals, Inc. (TERN - Free Report) , AllianceBernstein Holding L.P. (AB - Free Report) and ALLETE, Inc. (ALE - Free Report) are a few stocks that have witnessed new analyst coverage lately. These, therefore, are expected to attract investor attention.

Coverage initiation by analyst(s) on a stock portrays higher investor inclination. Investors, on their part, often assume there is something special in a stock to attract 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 three 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 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 the volume isn’t enough, it will not attract individual investors).

Here are three out of the six stocks that passed the screen:

Terns Pharmaceuticals: This is a clinical-stage biopharmaceutical company based in Foster City, CA. Terns Pharmaceuticals engages in the development of small-molecule single-agent and combination therapy candidates for the treatment of non-alcoholic steatohepatitis and obesity.

TERN stock currently carries a Zacks Rank #2 (Buy). The stock has gained 122.2% over the past six months against the industry’s 16.2% decline. Loss estimates for 2022 have narrowed to $2.10 per share from $2.18 over the past 30 days. The estimated figure calls for a 5% improvement from the year-ago period. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AllianceBernstein: This is a New York, NY-based publicly owned company that provides diversified investment management services to its clients.

AB currently carries a Zacks Rank #3 (Hold). The stock has declined 26.2% over the past six months, underperforming the industry’s 18.1% decline. Nonetheless, earnings estimates for 2022 have increased to $2.97 per share from $2.85 over the past 60 days, depicting analysts’ optimism over the company prospects.

ALLETE: Headquartered in Duluth, MN, ALLETE is an energy company operating through Regulated Operations, ALLETE Clean Energy, and Corporate and Other segments.

ALE currently carries a Zacks Rank #3. The stock has declined 24.3% over the past six months, underperforming the industry’s 21.5% decline. Nonetheless, earnings estimates for 2022 have increased to $3.74 per share from $3.73 over the past 30 days, depicting analysts’ optimism over the company prospects.

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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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AllianceBernstein Holding L.P. (AB) - free report >>

Allete, Inc. (ALE) - free report >>

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