Many investors have immense faith 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:
Teledyne Technologies Incorporated (TDY - Free Report) , a provider of instrumentation, digital imaging, aerospace and defense electronics, and engineered systems, currently sports a Zacks Rank #1 (Strong Buy). Shares of Teledyne Technologies have outperformed its industry over the past year. The company's earnings estimates have risen 0.3% 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 stocks here.
Genfit SA (GNFT - Free Report) , a biopharmaceutical company, currently carries a Zacks Rank #2 (Buy). Shares of the company have gained 12.6% since Mar 27, outperforming its industry. Loss estimates or the current year have narrowed to $2.92 per share from $4.43 over the past 30 days.
Shoe Carnival, Inc. (SCVL - Free Report) , one of the nation's largest family footwear retailers, currently carries a Zacks Rank #3 (Hold). Shares of Shoe Carnival have returned 51.8% in a year’s time against its industry’s 14.4% decline. Earnings estimates have remained stable for the current year over the past 30 days.
ZTO Express (Cayman) Inc. (ZTO - Free Report) , an express delivery and other value-added logistics service provider, carries a Zacks Rank #3. Shares of ZTO Express have returned 20% in a year’s time against its industry’s 0.8% decline. Earnings estimates have remained stable for the current year over the past 30 days.
GCI Liberty, Inc. (GLIBA - Free Report) , a communication service provider, currently carries a Zacks Rank #3. Shares of GCI Liberty have outperformed its industry over the past year and its earnings for the current year are expected to rise 90.5%.
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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