Coverage initiation on a stock by analyst(s) plays a key 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.
New Analyst Coverage & 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 five of the 11 stocks that passed the screen:
Harsco Corporation (HSC - Free Report) , an industrial services and engineered products provider, has seen its shares climb 51.2% this year, while its industry has gained 22.9%. The stock carries a Zacks Rank #2 (Buy) and its estimates have moved 2.5% north for 2018 and 3.7% for 2019 over the past 60 days. Earnings for the company are expected to rise 66.2% in the current year and 13.8% in 2019.
The Hanover Insurance Group, Inc. (THG - Free Report) , a property and casualty insurance products and service provider, has gained 10.7% year to date, outperforming its industry’s 7% growth. This Zacks Rank #2 stock’s earnings estimates have moved 0.6% north for the current year and 2.9% for the next over the past 60 days. The company’s bottom line is expected to witness around 81.4% year-over-year growth in the current year.
Avaya Holdings Corp. (AVYA - Free Report) provides real-time communication applications. Although this Zacks Rank #2 stock has underperformed its industry year to date, estimates have been trending upward over the past 60 days. Earnings estimates have increased 3.9% for the current year and 4.8% for the next over the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Ternium S.A. (TX - Free Report) is the leading producer of flat and long steel products in Latin America. While Ternium has underperformed the industry so far this year, this Zacks Rank #3 (Hold) company’s earnings estimates have moved up 6% for 2018 and 5.9% for 2019 over the past 30 days, reflecting analysts’ optimism on the stock’s earnings potential. The company’s earnings are expected to see around 47.9% year-over-year growth in 2018.
eXp World Holdings, Inc. (EXPI - Free Report) , a cloud-based real estate brokerage services provider primarily in the United states and Canada, has seen its shares rise 112.5% this year, while its industry has declined 9.6%. Loss estimates have significantly narrowed over the past 60 days. Loss estimates have narrowed to 26 cents per share from loss of 59 cents over the past 60 days for 2018.
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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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