Most investors depend on 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 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 limited 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 13 stocks that passed the screen:
Anixter International Inc. (AXE - Free Report) , a Zacks Rank #1 (Strong Buy) stock, is a leading global distributor of Network & Security Solutions, Electrical & Electronic Solutions and Utility Power Solutions. The stock has gained 56.5% year to date, outperforming its industry’s 21.1% growth. Earnings estimates have moved 7.1% up for the current year over the past 30 days. The company’s earnings for the current year are expected to grow 27.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Ellington Financial Inc. (EFC - Free Report) , also a Zacks Rank #1 company, acquires and manages mortgage-related, consumer-related, corporate-related, and other financial assets in the United States. Although the stock has underperformed its industry year to date, earnings estimates for the current year have moved 4.1% north over the past 30 days, depicting solid growth prospects. The company’s earnings for the current year are expected to grow 26.2%.
Diamond S Shipping Inc. (DSSI - Free Report) operates as a shipping company. Shares of this Zacks Rank #1 company have gained 25.8% year to date, outperforming its industry’s rally of 19.4%. Earnings estimates have climbed 306.5% for the current year over the past 30 days.
Gates Industrial Corporation plc (GTES - Free Report) , a Zacks Rank #1 company, manufactures and sells engineered power transmission and fluid power solutions worldwide. The company has rallied more than 51% in the past three months, outperforming its industry’s 15.8% gain. The company’s trailing 12-month return on equity or ROE is 11.6%, higher than the industry’s 10.4%.
Progress Software Corporation (PRGS - Free Report) is Zacks Rank #2 (Buy) company, which develops business applications worldwide. Shares of Progress Software have underperformed its industry year to date. Earnings estimates have risen 2.3% for the current year over the past 30 days, reflecting solid prospects.
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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