New analyst coverage unearths extensive data on stocks for investors. Analysts are privy to vital information, which is crucial for investment decisions as lack of information creates chances of misinterpretation of stocks (over- or under-valued).
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.
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 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 preferred over 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 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 more positive price reaction than Hold recommendations. On the contrary, analysts hardly initiate coverage with a Strong Sell or Sell recommendation.
Now, if an analyst gives 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 seven stocks that passed the screen:
Balchem Corporation (BCPC - Free Report) provides state-of-the-art solutions and the finest quality products for a range of industries and currently carries a Zacks Rank #2 (Buy). Shares of Balchem have returned 12.9% over the past three months against its industry’s 8.2% decline. Earnings estimates have risen 7.9% for the current year over the past 30 days, depicting analysts’ optimism over the stock’s earnings potential. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Methode Electronics, Inc. (MEI - Free Report) , a global manufacturer of electronic components and subsystems, currently carries a Zacks Rank #2. The company’s shares have increased more than 20% over the past three months, outperforming its industry’s 10% growth. Earnings estimates have advanced 12.7% over the past seven days for the current year.
Chemed Corporation (CHE - Free Report) , the nation's largest provider of end-of-life hospice care services, carries a Zacks Rank #2. Shares of the company have outperformed its industry over the past three months. Earnings estimates have increased 1% over the past 30 days for the current year.
Ubiquiti Networks, Inc. (UBNT - Free Report) develops networking technology for service providers, enterprises, and consumers. It currently carries a Zacks Rank #3 (Hold) and its shares have gained 24.7% over the past three months (outperforming its industry). Earnings estimates have increased 6.6% over the past 30 days for the current year.
HEXO Corp. (HEXO - Free Report) , a consumer-packaged goods cannabis company, carries a Zacks Rank #3. Although shares have underperformed its industry since January, loss estimates have narrowed down to 8 cents for the current year from 11 cents over the past 30 days.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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