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 10 stocks that passed the screen:
ACM Research, Inc. (ACMR - Free Report) is a Zacks Rank #1 (Strong Buy) company, which develops, manufactures, and sells single-wafer wet cleaning equipment. Although the stock has underperformed its industry in a year’s time, earnings estimates have risen 30.9% 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 stocks here.
K12 Inc. (LRN - Free Report) is a technology-based education company, which currently sports a Zacks Rank #1. Shares have gained 70.5% in the past year, outperforming its industry’s rally of 31%. Earnings estimates have risen 6.7% for the current year over the past 30 days.
McGrath RentCorp (MGRC - Free Report) operates as a business to business rental company in the United States and internationally and currently carries a Zacks Rank #2 (Buy). The stock has gained 13.8% in the past year compared with its industry’s decline of 4.9%. Earnings estimates have risen 3.2% for the current year over the past 30 days.
The Hanover Insurance Group, Inc. (THG - Free Report) is a non-insurance holding company. It currently carries a Zacks Rank #2. The stock has outperformed its industry’s in a year’s time and its earnings estimates have risen 1.2% for the current year over the past 30 days, depicting the stock’s solid growth potential. Earnings for the current year are expected to grow 20.8%.
Turning Point Brands, Inc. (TPB - Free Report) , a tobacco products provider in the United States, currently carries a Zacks Rank #3 (Hold). The stock has gained 14.9% in a year’s time against its industry’s decline of 16.5%. The company’s earnings for the current year are expected to grow a solid 16.4%.
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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