Coverage initiation on a stock by analyst(s) leads to increased investor enthusiasm. This is because investors generally believe that the stock holds some value to have attracted analysts to cover it.
Of course, stocks are not randomly picked to cover. A new coverage on a stock is usually the result of a promising future envisioned by 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?
Interestingly, stocks typically see an incremental price movement with a new analyst initiating coverage compared to what they witness with a rating upgrade under an existing coverage. Of course, the price movement is a function of the recommendations from new analysts. Positive recommendations – Buy and Strong Buy – generally lead to a significant positive price reaction than Hold recommendations. In this regard, analysts hardly initiate coverage with a Strong Sell or Sell recommendation.
However, one should also look for the average change in broker recommendation rather than a single recommendation change.
Now, if an analyst gives a new recommendation on a company that has limited 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).
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:
AppFolio, Inc. (APPF - Free Report) offers cloud-based software solutions for property management and legal industries. The stock has climbed 80.5% year to date, while the industry gained 17.2%. This Zacks Rank #1 (Strong Buy) stock has seen earnings estimates move up 113.3% for this year and 50% for the next over the past 30 days. Positive earnings estimate revisions for 2017 and 2018 along with an expected earnings growth rate of 366.7% for 2017 and 39.6% for the next indicate the stock’s potential for price appreciation. The company has a solid average positive earnings surprise of 241.7% for the trailing four quarters.
Headquartered in Beijing, China, Weibo Corporation (WB - Free Report) operates as a social media platform for people to create, distribute and discover Chinese-language content. The stock saw positive earnings estimate revision of 7 cents for this year over the past 30 days, with an expected growth rate of a 103.1%. The stock, with a Zacks Rank #2 (Buy), has skyrocketed 153.4% year to date, faring much better than its industry’s 52.2% rise. You can see the complete list of today’s Zacks #1 Rank stocks here.
SYNNEX Corporation SNX is a global IT supply chain services company. The stock carries a Zacks Rank #3 (Hold) and sports a solid VGM Score of A. The company has an average positive surprise of 15.09% for the trailing four quarters, with four back-to-back beats. The company has a solid earnings growth rate of 14.7% for the current quarter and 19.8% for the current year.
Liberty Media Corporation (FWONA - Free Report) is engaged in media, communications and entertainment businesses. The stock has outperformed the industry, gaining 18.9% so far this year. The company has a solid average positive earnings surprise of 37.41% for the trailing four quarters and holds a Zacks Rank #3.
Urban Edge Properties (UE - Free Report) , a real estate investment trust, returned 4.6% in the last three months, as against its industry’s 1.8% rise. The company has a solid earnings growth rate of 84.2% for the current quarter and 50% for the current 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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