Coverage initiation on a stock by analyst(s) 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.
Notably, the average change in broker recommendation is preferred over a single recommendation change.
Influence on Stock Price
It is interesting to note that the price impact of analyst initiation depends on the initial recommendation. Positive recommendations — Buy and Strong Buy — generally lead to a significantly positive price reaction in comparison to Hold recommendations. On the contrary, analysts hardly initiate coverage with a Strong Sell or Sell recommendation. Meanwhile, stocks typically see an upward price movement with a new analyst coverage compared to what is witnessed with a rating upgrade under an existing coverage.
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.
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 11 stocks that passed the screen:
AllianceBernstein Holding L.P. (AB - Free Report) , a diversified investment management service provider, currently carries a Zacks Rank #2 (Buy). Shares have gained 12.6% year to date, compared with its industry’s rally of 19.3%. The company's earnings estimates have risen 3% for the current year over the past seven 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.
LiqTech International, Inc. (LIQT - Free Report) , a clean technology company, currently has a Zacks Rank #3 (Hold). Shares have gained 77% year to date, outperforming its industry’s rally of 31%. The company’s earnings for the current year are expected to grow a solid 133.3%.
Amadeus IT Group, S.A. (AMADY - Free Report) provides technology solutions for the global travel industry and currently carries a Zacks Rank #3. Although the stock has underperformed its industry year to date, earnings estimates have risen 1% for the current year over the past 30 days, depicting the stock’s solid growth potential.
Plantronics, Inc. (PLT - Free Report) , a global leader in audio communications for businesses and consumers, currently carries a Zacks Rank #3. The company’s Return on Equity (ROE) of 20% is higher than the industry’s 2.6%. A high ROE means the company is spending wisely and is in all possibilities running a profitable business.
Aerojet Rocketdyne Holdings, Inc. (AJRD - Free Report) designs, develops, manufactures, and sells aerospace and defense products and systems in the United States and currently carries a Zacks Rank #3. Its shares have gained 28.7% year to date, compared with its industry’s rally of 32.4%. That said, earnings estimates have risen 18.4% for the current year over the past 90 days, depicting analyst optimism over the stock’s earnings potential.
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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