As analysts are the most important information intermediaries in capital markets, initiation of coverage by them offers critical information on a stock which is of great value to investors.
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 coverage definitely has some value.
Obviously, stocks are not randomly chosen to cover. New coverage 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 worth mentioning here that the average change in broker recommendation is always preferred over a single recommendation change.
Impact on Price Movement
The price movement of a stock is the function of the recommendations on it from new analysts. Typically, stocks see an upward price movement on new analyst coverage compared to what was witnessed 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.
Meanwhile, investors start paying more attention to the stock (that has very few or no existing coverage) on which an analyst provides a new recommendation. Also, any new information attracts portfolio managers to build a position in the stock.
Below, we have selected five 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).
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 eight stocks that passed the screen:
Columbus McKinnon Corporation (CMCO - Free Report) , a broad-line designer, manufacturer and supplier of sophisticated material handling products and integrated material handling solutions, returned 17.5% year to date, outperforming its industry’s 5.6% gain. The company surpassed the Zacks Consensus Estimate in two of the past four quarters at an average of 10.70%. The stock sports a Zacks Rank #1 (Strong Buy).
The New York Times Company (NYT - Free Report) , a global media organization, has climbed 43.6% year to date, while the industry gained 11.3%. This Zacks Rank #2 (Buy) stock has seen earnings estimates move up 14.3% for this year and 13.2% for the next over the past seven days. Positive earnings estimate revisions for 2017 and 2018 along with an expected earnings growth rate of 26.3% for 2017 and 6.9% for the next indicate the stock’s potential for price appreciation. The company has a solid average positive earnings surprise of 43.06% for the trailing four quarters.
Advanced Accelerator Applications S.A. (AAAP - Free Report) , a radiopharmaceutical company, has outperformed the industry, gaining 79.6% so far this year. Earnings estimates for this Zacks Rank #3 (Hold) stock have been trending upward for the current and next year over the past 90 days. You can see the complete list of today’s Zacks #1 Rank stocks heree.
Positive earnings estimate revisions along with an expected earnings growth rate of 152.9% for 2018 indicate the stock’s potential for further price appreciation.
Enanta Pharmaceuticals, Inc. (ENTA - Free Report) , a biotechnology company, has gained 18.5%, outperforming the 2.9% rally of the industry it belongs to. The company holds a Zacks Rank #3 and has a low beta of 0.66.
Caesars Entertainment Corporation (CZR - Free Report) , a gaming company, has rallied 42.3% year to date, significantly outperforming the industry’s 18.8% rise. The company has a solid earnings growth rate of 99.5% for this year and 404.2% for the next.
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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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