Coverage initiation on a stock by analyst(s) majorly helps in interpreting information pertaining to capital markets, 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.
Analyst Coverage & Price Movement
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 eight stocks that passed the screen:
Global Net Lease, Inc. (GNL - Free Report) , a publicly traded real estate investment trust, sports a Zacks Rank #1 (Strong Buy). Although the company’s shares have underperformed its industry in a year’s time, the company is expected to receive a boost in the near term as is evident from the recent estimate revision trend. Earnings estimates have climbed 4.4% for the current year over the past 60 days, reflecting analysts’ optimism over the stock’s prospects. You can see the complete list of today’s Zacks #1 Rank stocks here.
CECO Environmental Corp. (CECE - Free Report) provides critical solutions to the environmental, energy, and fluid handling and filtration industries worldwide. Shares of this Zacks Rank #2 (Buy) company have gained 40.4% in the past year, while its industry has declined 1.2%. Earnings estimates for the current year have moved 7.4% north over the past 60 days.
American Vanguard Corporation (AVD - Free Report) develops, manufactures, and markets specialty chemicals for agricultural, commercial, and consumer uses in the United States and internationally. Although the company’s shares have underperformed its industry in a year’s time, this Zacks Rank #3 (Hold) company’s earnings estimates for the current year have moved 1.3% north over the past 60 days. Earnings for the company are expected to rise 40.4% in the current year.
Fidelity Southern Corporation operates as the holding company for Fidelity Bank. Shares of this Zacks Rank #3 company have gained 17.5% in a year’s time, while its industry has declined 20%. Earnings estimates for the current year have moved 3.9% north over the past 60 days. Earnings are expected to rise 22.1% in the current year.
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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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