Investors have immense faith in the research work of analysts as they fear that misinterpretations while researching on their own might trigger inefficiencies. Here, analysts play a vital intermediary role with their extensive access to relevant data.
Coverage initiation of a stock by analyst(s) usually portrays higher investor inclination. Investors, on their part, often assume 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 has 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 investors’ focus on a stock motivates analysts to take a closer look at it. After all, who doesn’t love 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.
It is needless to say, the average change in broker recommendation is preferred over a single recommendation change.
How Does Analyst Coverage Influence 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 eight stocks that passed the screen:
LexinFintech Holdings Ltd. (LX - Free Report) , which operates as an online consumer finance platform for young adults in the People's Republic of China, currently sports a Zacks Rank #1 (Strong Buy). Shares of the company have gained 70.1% year to date, outperforming its industry’s rise of 24.1%. The company's earnings estimates have risen 3.7% for the current year over the past 30 days, depicting analyst optimism over the stock’s earnings potential. You can see the complete list of today’s Zacks #1 Rank stocks here.
Veeco Instruments Inc. (VECO - Free Report) develops, manufactures, sells, and supports semiconductor and thin film process equipment. The stock currently sports a Zacks Rank #1 and shares have gained 57.9% year to date, outperforming its industry’s rally of 17.3%. Loss estimates for the current year have narrowed down to 15 cents per share from 30 cents over the past 30 days.
Helen of Troy Limited (HELE - Free Report) , a leading global consumer products company, currently carries a Zacks Rank #2 (Buy). Although shares of the company have underperformed its industry year to date, earnings estimates have risen 0.3% over the past 30 days.
Surmodics, Inc. (SRDX - Free Report) , a leading provider of medical device and In Vitro Diagnostics technologies to the healthcare industry, currently carries a Zacks Rank #3 (Hold). Although shares of Surmodics have underperformed its industry year to date, its earnings estimates have risen 100% for the current year over the past 30 days.
Herman Miller, Inc. (MLHR - Free Report) , an office furniture, equipment and home furnishing manufacturer, currently carries a Zacks Rank #3. Shares of the company have gained 24.5% year to date, outperforming its industry’s rise of 9.4%. Earnings per share estimates for the current year have moved 3.6% north to $2.86 over the past 90 days.
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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