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 microscope definitely has some value.
Lack of information creates inefficiencies that might result in stocks being misrepresented (over- or under-valued). Thus, initiation of coverage by analysts offers critical information on a stock which is of great value to investors.
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.
However, the average change in broker recommendation is preferred over a single recommendation change.
Analyst Coverage & Price Movement
Interestingly, the price movement is generally a function of the recommendations from the 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.
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 15 stocks that passed the screen:
Energy Recovery, Inc. (ERII - Free Report) is a San Leandro, CA-based leading firm from the pollution control industry. The company manufactures devices that transform untapped energy into reusable energy from industrial fluid flows and pressure cycles. The company’s shares have jumped more than 134.8% year to date. This Zacks Rank #1 (Strong Buy) stock also has an impressive return profile with estimated 3-5 year earnings growth rate of 15%.
Simpson Manufacturing Co., Inc. (SSD - Free Report) , headquartered in Pleasanton, CA, is a leading manufacturer of wood construction products that operates through its subsidiary, Simpson Strong-Tie Company Inc. Simpson Manufacturing carries a Zacks Rank #3 (Hold) and has seen shares rise 36.7% since the beginning of the year. The company’s estimated 3–5 year earnings growth rate stands at 10%.
Bethlehem, PA-based OraSure Technologies, Inc. (OSUR - Free Report) is a leader in point of care diagnostic tests and specimen collection devices. It develops and manufactures diagnostic products, oral fluid specimen collection devices, laboratory diagnostic products and other medical devices. This Zacks Rank #3 stock’s estimated 3–5-year earnings growth rate of 15% shows promise. The stock has advanced approximately 28.3% so far this year.
Provident Financial Services, Inc. (PFS - Free Report) - the holding company of The Provident Bank - is a community- and customer-oriented banking company. The company boasts a dividend yield of 3.43% with a P/E (F1) of 15.36, lower than the industry average of 18.9. It has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
CO-based National Bank Holdings Corp. (NBHC - Free Report) , a bank holding company, provides various banking products and financial services to commercial and consumer clients in the U.S. This Zacks Rank #2 (Buy) company has posted positive earnings surprises in three of the last four quarters, with an average beat of 392.9%.
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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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