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The importance of new analyst coverage is evident from the extensive data it unearths for investors. Analysts are privy to vital information and are crucial to investment decisions.
Coverage initiation of a stock by analyst(s) usually portrays bigger investor inclination. Investors, on their part, often assume that there is something special in a stock to attract analysts to cover it. In other words, they believe that the company coming under the microscope definitely holds some value.
Do analysts create value for companies by initiating coverage? Of course they do because they play an important intermediary role with their extensive access to relevant data. Many investors have a deep trust in the research work done by analysts as they fear that lack of information while researching on their own might trigger inefficiencies.
Obviously, stocks are not randomly chosen to cover. A new coverage on a stock usually reflects a reassuring future envisioned by the analyst(s). At times, increased investor focus on a stock motivates analysts to take a closer look at it. After all, who doesn’t like 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.
Needless to say, the average change in broker recommendation is more preferable than a single recommendation change.
Impact 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.)
The number of 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 of the 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 5 of the 11 stocks that passed the screen:
Craft Brew Alliance Inc. , a leading craft brewing company, is engaged in brewing, marketing and selling of craft beers in the U.S. Its second-quarter 2016 net sales, shipments and depletions were the highest in the company’s history. Owing to solid top-line growth and gross margin expansion, along with the anticipated incremental operational benefits in the second half of 2016, the company maintained its full-year guidance. Its estimated 3–5-year earnings growth rate of 25% shows promise.
EZCORP, Inc. (EZPW - Free Report) is a leading provider of pawn loans in the U.S. and Mexico. In the recently reported third-quarter fiscal 2016, the company reversed its year-ago loss per share of 1 cent to earnings of 5 cents. This was driven by revenue growth from strong customer engagement and continued focus on expense management.
Service Corporation International (SCI - Free Report) is the largest provider of funeral and cemetery services in the world. During recently reported second quarter, it spend $52.8 million on accretive acquisitions and returned $52.0 million to shareholders through share repurchase and dividend. The company’s solid return profile and estimated 3–5 year earnings growth rate of 12% are impressive.
Transocean Partners LLC owns, operates and acquires modern, technologically advanced offshore drilling rigs. The company drills for oil and gas in the U.S. Gulf of Mexico. The stock has a high dividend yield of 12.36% and its estimated 3-5 year earnings growth rate of 13% shows promise. So far this year, the stock has advanced almost 33%.
Barnes & Noble, Inc. is a leading retail bookseller and retailer of content, digital media and educational products in the U.S. The company has an impressive return profile with estimated 3–5 year earnings growth rate of 10%. The stock has appreciated nearly 31% year to date.
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.
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 »
Unique Zacks Analysis of Your Chosen Ticker
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5 Stocks About to Pop on New Analyst Coverage
The importance of new analyst coverage is evident from the extensive data it unearths for investors. Analysts are privy to vital information and are crucial to investment decisions.
Coverage initiation of a stock by analyst(s) usually portrays bigger investor inclination. Investors, on their part, often assume that there is something special in a stock to attract analysts to cover it. In other words, they believe that the company coming under the microscope definitely holds some value.
Do analysts create value for companies by initiating coverage? Of course they do because they play an important intermediary role with their extensive access to relevant data. Many investors have a deep trust in the research work done by analysts as they fear that lack of information while researching on their own might trigger inefficiencies.
Obviously, stocks are not randomly chosen to cover. A new coverage on a stock usually reflects a reassuring future envisioned by the analyst(s). At times, increased investor focus on a stock motivates analysts to take a closer look at it. After all, who doesn’t like 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.
Needless to say, the average change in broker recommendation is more preferable than a single recommendation change.
Impact 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.)
The number of 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 of the 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 5 of the 11 stocks that passed the screen:
Craft Brew Alliance Inc. , a leading craft brewing company, is engaged in brewing, marketing and selling of craft beers in the U.S. Its second-quarter 2016 net sales, shipments and depletions were the highest in the company’s history. Owing to solid top-line growth and gross margin expansion, along with the anticipated incremental operational benefits in the second half of 2016, the company maintained its full-year guidance. Its estimated 3–5-year earnings growth rate of 25% shows promise.
EZCORP, Inc. (EZPW - Free Report) is a leading provider of pawn loans in the U.S. and Mexico. In the recently reported third-quarter fiscal 2016, the company reversed its year-ago loss per share of 1 cent to earnings of 5 cents. This was driven by revenue growth from strong customer engagement and continued focus on expense management.
Service Corporation International (SCI - Free Report) is the largest provider of funeral and cemetery services in the world. During recently reported second quarter, it spend $52.8 million on accretive acquisitions and returned $52.0 million to shareholders through share repurchase and dividend. The company’s solid return profile and estimated 3–5 year earnings growth rate of 12% are impressive.
Transocean Partners LLC owns, operates and acquires modern, technologically advanced offshore drilling rigs. The company drills for oil and gas in the U.S. Gulf of Mexico. The stock has a high dividend yield of 12.36% and its estimated 3-5 year earnings growth rate of 13% shows promise. So far this year, the stock has advanced almost 33%.
Barnes & Noble, Inc. is a leading retail bookseller and retailer of content, digital media and educational products in the U.S. The company has an impressive return profile with estimated 3–5 year earnings growth rate of 10%. The stock has appreciated nearly 31% year to date.
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 »