Most investors trust research done by analysts to avoid inefficiencies triggered by lack of information. Thus, when it comes to coverage initiation, analysts naturally play a pivotal role.
Coverage initiation by analyst(s) on a stock 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 the microscope definitely has some value.
Obviously, stocks are not randomly chosen to cover. New coverage on a stock 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 needless to say, the average change in broker recommendation is preferred over a single recommendation change.
Influence on Stock 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 nine stocks that passed the screen:
Primerica, Inc. (PRI - Free Report) , a financial products and services provider, has seen its shares climb 20.7% this year, while its industry has declined 15.4%. The stock carries a Zacks Rank #1 (Strong Buy). Earnings for the company are expected to rise 30.1% in the current year and 13.6% in 2019.
Avaya Holdings Corp. (AVYA - Free Report) provides real-time communication applications. Although this Zacks Rank #1 stock has underperformed its industry year to date, estimates have been trending upward over the past 60 days. Earnings estimates have risen 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.
Shenandoah Telecommunications Company (SHEN - Free Report) , a telecommunications service provider, has gained 11.2% year to date against its industry’s 18.3% decline. This Zacks Rank #2 (Buy) stock’s earnings are expected to witness around 119.2% year-over-year growth in the current year.
DMC Global Inc. (BOOM - Free Report) , a technology company, has gained 64% year to date, outperforming its industry’s 23.9% growth. This Zacks Rank #3 (Hold) stock’s earnings are expected to witness around 1,106.3% year-over-year growth in the current year.
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 142% this year, while its industry has declined 8%. Loss estimates have significantly narrowed over the past 60 days for this Zacks Rank #2 company. Loss estimates have narrowed to 37 cents per share from loss of 49 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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