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3 Stocks in Focus on New Analyst Coverage

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The importance of coverage initiation on a stock by analyst(s) can be well traced by its significant role in interpreting information pertaining to capital markets, thereby creating value for investors. Lack of information creates inefficiencies that might trigger misinterpretation of stocks (over- or under-valued).

In fact, coverage initiation usually depicts increased investor inclination. Investors, on their part, often assume that there is something in the stock that has attracted analyst attention. In other words, they believe that the company coming under the microscope definitely has some value.

Obviously, stocks are not arbitrarily chosen to cover. New coverage on a stock usually reflects an encouraging future envisioned by the analyst(s). At times, increased investor focus on a stock motivates analysts to take a closer look at it.

However, the average change in broker recommendation is preferred over a single recommendation change.

Analyst Coverage & Price Movement

It is interesting to note that the price movement is generally a function of recommendations 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 issues 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).

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 three stocks that passed the screen:

Arbor Realty Trust, Inc. (ABR - Free Report) invests in a diversified portfolio of structured finance assets in the multifamily and commercial real estate markets. This Zacks Rank #3 (Hold) stock has gained 12.6% in a year, outperforming its industry’s gain of just 0.1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company has also performed well on the earnings front, beating the Zacks Consensus Estimate in the trailing four quarters with average positive surprise of 31.89%. The stock has seen earnings estimates move up 10% for 2018 over the past 90 days, depicting the stock’s potential to scale higher.

Simpson Manufacturing Co., Inc. (SSD - Free Report) , through its subsidiaries, designs, engineers, manufactures, and sells building construction products. This Zacks Rank #3 stock has seen earnings estimates rise 13.1% for 2018 over the past 90 days. The stock has gained more than 32% in a year, outperforming its industry’s gain of 27%.

Atara Biotherapeutics, Inc. (ATRA - Free Report) , a clinical-stage biopharmaceutical company, has gained 90.9% in the past year, while its industry grew 1.5%. Earnings estimates for 2018 have remained stable for the last 60 days.

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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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