Many investors have immense confidence in the research work of analysts as they fear that misinterpretations while exploring on their own might trigger inefficiencies. Here, analysts play a vital intermediary role with their extensive access to relevant data.
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 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 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 10 stocks that passed the screen:
Walker & Dunlop, Inc. (WD - Free Report) , a commercial real estate financial services provider, currently sports a Zacks Rank #1 (Strong Buy). Although shares of Walker & Dunlop have underperformed its industry over the past year, earnings estimates have risen 4.2% for the current year over the past 60 days, depicting analysts’ optimism over the stock’s earnings potential. You can see the complete list of today’s Zacks #1 Rank stocks here.
Herc Holdings Inc. (HRI - Free Report) ), an equipment rental supplier, currently carries a Zacks Rank #1. Although the company’s shares have underperformed its industry over the past year, earnings estimates have advanced 31.4% over the past 60 days for the current year.
ICICI Bank Limited (IBN - Free Report) , a Zacks Rank #2 (Buy) stock, provides banking and financial services in India and internationally. Shares of ICICI Bank have returned 27.1% in a year’s time against its industry’s 12.4% decline. Earnings estimates have risen 10.5% for the current fiscal year over the past 60 days.
HDFC Bank Limited (HDB - Free Report) , an Indian Bank, currently carries a Zacks Rank #3 (Hold). The company’s shares have gained 15.3% over the past year, against its industry’s 12.4% decline. Earnings estimates have moved up 0.9% over the past 30 days for the current year.
resTORbio, Inc. (TORC - Free Report) , a clinical-stage biopharmaceutical company, carries a Zacks Rank #3. Over the past year, shares of resTORbio have underperformed its industry. Nonetheless, the company’s loss estimates have narrowed down to $1.97 per share from $2.23 over the past 30 days for 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