The importance of new analyst coverage is evident from the extensive data it unearths for investors.
Do analysts create value for companies by initiating coverage? Coverage initiation on a stock by analyst(s) is actually a sign of increased investor keenness.
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.
Why do analysts initiate coverage? Of course, stocks are not randomly picked to cover. New coverage on a stock is usually the result of a promising 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 back something that is already in demand?
Impact of Analyst Coverage on Stock Price
The price movement of a stock is generally a function of the recommendations on it from new analysts. Stocks typically see an upward price movement with 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.
However, one should also look for the average change in broker recommendation rather than a single recommendation change.
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:
WillScot Corporation (WSC - Free Report) , a specialty rental services provider primarily in North America, has seen its shares climb 39.4% over the past one year, while its industry declined 22%. The stock carries a Zacks Rank #3 (Hold). Earnings for the company are expected to rise 97.7% in the current year and 552.8% in 2019.
Primerica, Inc. (PRI - Free Report) , a financial products and services provider, has seen its shares climb 28.1% in the past one year, while its industry has declined 18.2%. The stock carries a Zacks Rank #3. Earnings for the company are expected to rise 30.1% in the current year and 13.6% in 2019.
Bovie Medical Corporation (BVX - Free Report) , a medical device company, has gained 68.6% over the past year, outperforming its industry’s 15.5% growth. This Zacks Rank #3 stock has a three-five year expected EPS growth rate of 30%. 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 outperformed its industry in the past year. This Zacks Rank #3 stock’s earnings are expected to witness around 119.2% year-over-year growth in the current year and 59.1% in the next.
Herbalife Nutrition Ltd. (HLF - Free Report) , a global network marketing company, has gained 33.9% over the past year, outperforming its industry’s 5.8% growth. This Zacks Rank #3 stock’s earnings are expected to witness around 13.2% year-over-year growth in the current year and 12.7% in the next.
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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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