The importance of new analyst coverage is evident from the extensive data it unearths for investors. Analysts are privy to vital information, which is crucial for taking investment decisions.
Coverage initiation on a stock by analyst(s) usually portrays higher investor inclination. Investors, on their part, often assume that there is something special in a stock to attract analysts to cover it. In other words, they believe that the company coming under the microscope definitely holds some value.
Do analysts create value for companies by initiating coverage? Of course they do because they play an important intermediary role with their extensive access to relevant data. Many investors have immense faith in analysts’ research as they fear that lack of information might trigger inefficiencies.
Obviously, stocks are not randomly chosen to cover. A new coverage on a stock usually reflects a reassuring future envisioned by the analyst(s). At times, increased investor focus on a stock motivates analysts to take a closer look at it. After all, who doesn’t like 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.
Needless to say, the average change in broker recommendation is more preferable than a single recommendation change.
Impact 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.
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 12 stocks that passed the screen:
National Instruments Corporation (NATI - Free Report) , an American multinational company with international operations, has gained 9.4% in the past year, while its industry has declined 8.6%. The stock sports a Zacks Rank #1 (Strong Buy). Earnings for the company are expected to rise 58.5% in the current year and 13.9% in 2019.
KEMET Corporation (KEM - Free Report) , a leading global supplier of passive electronic components, has seen its shares climb 36.3% over the past year, while its industry declined 11.3%. The stock carries a Zacks Rank #3 (Hold). Earnings for the company are expected to rise 40% in the current year and 15% in 2019.
Talos Energy Inc. (TALO - Free Report) , engaged in exploration, development and production of oil and natural gas properties, has declined 16.3% over the past year, while its industry declined 8.5%. Nonetheless, the company, a Zacks Rank #3 stock, is expected to return to growth in the near term as is evident from the recent estimate revision trend. Earnings estimates have climbed 16.9% for the current year and 6.3% for 2019 over the past 60 days, reflecting analysts’ optimism over the stock’s earnings prospects.
Veritiv Corporation (VRTV - Free Report) , a North American business-to-business distribution solutions provider, has outperformed its industry in the past year. The stock carries a Zacks Rank #3. Earnings for the company are expected to rise 516.5% in the current year and 28.3% in 2019. You can see the complete list of today’s Zacks #1 Rank stocks here.
Zix Corporation (ZIXI - Free Report) , a leading provider of hosted email encryption and e-prescribing services, has gained 40.7% over the past year, outperforming its industry’s 25% growth. This Zacks Rank #3 stock has a three-five year expected EPS growth rate of 15%.
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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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