Coverage initiation on a stock by analyst(s) plays a 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.
Impact on Price
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.
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 four of the 10 stocks that passed the screen:
Unisys Corporation (UIS - Free Report) , a worldwide technology services and solutions company, has advanced more than 47% in the last six months, outperforming its industry’s gain of 17.8%. Full-year 2018 earnings for this Zacks Rank #1 company are expected to grow 95.3%, higher than the industry’s 20.3%. Estimates for 2018 have also been trending upward over the last 30 days.
Shares of Catalyst Biosciences, Inc. (CBIO - Free Report) , a biopharmaceutical company, have rallied more than 710% in the last six months, while its industry has declined 9.5%. The stock carries a Zacks Rank #3 (Hold). Its full-year 2018 earnings for the company are expected to grow 44%, higher than the industry’s 7.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Loss estimates for 2018 have narrowed over the last 30 days to $4.17 from $5.40.
Liberty Ventures , primarily focused on business investments, carries a Zacks Rank #2 (Buy). The stock has a trailing twelve-month return on equity (ROE) of 8.7%, higher than the industry’s 4.3%. Loss estimates for 2018 have narrowed to 18 cents per share from 35 cents over the last 60 days.
New Mountain Finance Corporation (NMFC - Free Report) , a business development company, has a trailing 12-month return on equity (ROE) of 10.3%, higher than the industry’s 8.8%. This Zacks Rank #3 stock has seen earnings estimates move up 0.7% for 2018 over the past seven days, depicting the stock’s potential to scale higher. Full-year 2018 earnings for the company are expected to grow 7.8%, higher than the industry’s 2%.
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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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