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Analyst Blog

Lack of information creates inefficiencies that might result in misinterpretation of stocks (over- or under-valued). Thus, initiation of coverage by analysts offers critical information on a stock which is of great value to investors.

Coverage initiation of a stock by analyst(s) usually depicts greater investor inclination. Investors, on their part, often assume 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 has some value.

Obviously, stocks are not arbitrarily chosen to cover. A new coverage on a stock usually reflects an encouraging 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?

Needless to say, considering the average change in broker recommendation is preferable over a single recommendation change.

Analyst Coverage & Price Movement

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 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 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 stocks that passed the screen:

Coherent Inc. (COHR - Free Report) designs, manufactures, and supplies electro-optical systems and medical instruments utilizing laser, precision optic and microelectronic technologies.

The company’s share price soared 107.1% year to date. Coherent has posted an average positive earnings surprise of around 10.00% over the trailing four quarters. Over the past 30 days, the Zacks Consensus Estimate for fiscal 2017 earnings increased 28.6% to $6.61 per share. Again, the Zacks Rank #1 (Strong Buy) for the stock adds to the optimism. You can see the complete list of today’s Zacks #1 Rank stocks here.

Based in Rochester, NY, Vuzix Corporation (VUZI - Free Report) provides personal display and wearable computing devices that offer users a portable high-quality viewing experience, mobility solutions, wearable displays and virtual and augmented reality. This Zacks Rank #3 (Hold) stock rallied approximately 14% year to date, backed by solid execution of operational plans.

World Acceptance Corp. (WRLD - Free Report) engages in small-loan consumer finance business in the U.S. and Mexico. This Zacks Rank #3 stock has surged over 60% so far this year and flaunts a VGM Score of A.

Telecom Argentina S.A. (TEO - Free Report) offers basic telephone service and fixes telecommunications links in the northern region of the Argentine Republic. The company has a VGM Score of A. The company has expected long-term EPS growth rate of 10.69%. It also has a P/E (F1) of 12.64, which is lower than the industry average of 14.00. Again, this Zacks Rank #3 stock offers a promising dividend yield of 3.66%.

Advanced Disposal Services, Inc. (ADSW - Free Report) is a waste management company. The company has its operations primarily in the U.S. Advanced Disposal Services is based in Ponte Vedra, FL. The company carries a Zacks Rank #3 and a VGM Score of A.  

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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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