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.
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 15 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. The stock has outperformed its industry so far this year. Its earnings estimates have risen 34.5% 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.
GAIN Capital Holdings, Inc. (GCAP - Free Report) provides trading services and solutions to retail, institutional, and futures service customers worldwide. This Zacks Rank #1 stock has widely outperformed its industry over the past three months. Loss estimates have narrowed to 49 cents from 68 cents over the past 60 days.
Cutera, Inc. (CUTR - Free Report) , a medical device company, which currently has a Zacks Rank #2 (Buy). The stock has gained 69.2% year to date, outperforming its industry’s rally of 22.2%. Earnings estimates have moved 533.3% up for the current year over the past 60 days. Its earnings for the current year are expected to grow a solid 72.7%.
Columbus McKinnon Corporation (CMCO - Free Report) , a broad-line designer, manufacturer and supplier of sophisticated material handling products and integrated material handling solutions, currently carries a Zacks Rank #2. The stock has outperformed its industry year to date and its earnings for the current year are expected to grow 10%. Also, the company’s return on equity (ROE) is indicative of growth potential. The company’s ROE of 15.4% compares favorably with the industry average of 14.7%, implying that it is efficient in using its shareholders’ funds.
Minerva Neurosciences, Inc. (NERV - Free Report) , a clinical-stage biopharmaceutical company, currently carries a Zacks Rank #2. The stock has gained 24.9% so far this year, outperforming its industry’s rally of 6.9%. Loss estimates have narrowed to $1.51 from $1.71 over the past 60 days.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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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