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 higher 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 profound trust in the research work done by analysts as they fear that lack of information while researching on their own might result in 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.
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 rallied more than 92.4% 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%.
Macquarie Infrastructure Corp. (MIC - Free Report) owns, operates and invests in a diversified group of infrastructure businesses, which provide basic, everyday services in the U.S. and other developed countries.The company sports a Zacks Rank #1 and has a dividend yieldof 6.10%. Again, a Growth Style Score of ‘A’ and projected EPS growth of 184.9% for 2016 lend more potential to the stock.
Sanderson Farms, Inc. (SAFM - Free Report) is a fully-integrated poultry processing company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products in the U.S. The company flaunts a Zacks Rank #1 and a VGM Score of A. Furthermore, Sanderson’s earnings estimates for the current year have improved 3.1% over the last 30 days.
Canon, Inc. (CAJ - Free Report) is an industry leader in professional and consumer imaging equipment and information systems. The company boasts a dividend yield of 4.61% and a VGM score of “B”. It has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Columbus, OH-based Worthington Industries Inc. (WOR - Free Report) is a leading value-added steel processor and manufacturer of metals products in the U.S. The company has a VGM score of “A” and sports a Zacks Rank #1. Over the past 30 days, the Zacks Consensus Estimate for fiscal 2017 and 2018 increased 18.9% and 20.5%, respectively, to $3.15 and $3.11 per share.
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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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