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5 Stocks in Focus on New Analyst Coverage

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Many investors have immense faith in analysts’ research as they fear that lack of information might trigger inefficiencies. Here, analysts play a vital intermediary role with their extensive access to relevant data.

Coverage initiation of a stock by analyst(s) usually portrays higher investor inclination. Investors, on their part, often assume there is something special in a stock to attract analysts’ attention. In other words, they believe that the company coming under the microscope definitely has some value.

Obviously, stocks are not randomly chosen to cover. New coverage on a stock 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 their ratings on continuously covered stocks.

It is needless to say, the average change in broker recommendation is preferred over a single recommendation change.

How does Analyst Coverage Influence 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 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 of the 10 stocks that passed the screen:

Lyon William Homes is primarily engaged in the design, construction, marketing and sale of single-family detached and attached homes in California, Arizona, Nevada and Colorado. The stock currently has a Zacks Rank #2 (Buy) and has rallied 86% in the last one year, outperforming 27.9% gain of the Zacks categorized Building- Residential/Commercial industry.

Heritage Commerce Corp. (HTBK - Free Report) is the holding company of Heritage Bank of Commerce, Heritage Bank East Bay, Heritage Bank South Valley and Bank of Los Altos. This Zacks Rank #3 (Hold) stock rallied approximately 52.1% in the last one year. Its expected EPS growth rate for 3–5 years is pegged at 10% and earnings for the current year are expected to increase 13.9%.

Magnachip Semiconductor Corp. (MX - Free Report) operates as a designer and manufacturer of analog and mixed-signal semiconductor products for high-volume consumer applications. The stock sports a Zacks Rank #1 and has climbed 95% in the last one year, outperforming the broader industry growth of 60.1%.

Comfort Systems USA Inc. (FIX - Free Report) is a national provider of comprehensive heating, ventilation and air conditioning installation, maintenance, repair and replacement services in the U.S. The stock currently has a Zacks Rank #3 and a VGM score of ‘B’. You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Also, the 3–5 year EPS growth rate for the stock is estimated at 10%. The stock climbed approximately 36% in the last one year.

Sterling Construction Company, Inc. (STRL - Free Report) is a heavy civil construction company in Texas, Utah, Nevada, Colorado, Arizona, California, Hawaii, and other states in the U.S. This is a Zacks Rank #3 stock that flaunts a VGM Score “A”. Moreover, the stock gained over 102.9% in the last one year.

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.

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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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