New analyst coverage unearths extensive data on stocks for investors. Analysts are privy to vital information, which is crucial for investment decisions as lack of information creates chances of misinterpretation of stocks (over- or under-valued).
Coverage initiation on a stock by analyst(s) usually portrays higher investor inclination. Investors, on their part, often assume that 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 holds 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 investor focus on a stock motivates analysts to take a closer look at it. After all, who doesn’t like 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.
Needless to say, the average change in broker recommendation is preferred over a single recommendation change.
Impact on 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 three stocks that passed the screen:
TechTarget, Inc. (TTGT - Free Report) , a leading online Information Technology media company, currently carries a Zacks Rank #2 (Buy). Shares of TechTarget have returned 136.5% year to date, outperforming its industry’s 4.9% rally. Earnings estimate for the current year has risen 4.2% over the past 30 days, reflecting the stock’s solid prospects. Earnings for the current year are expected to grow 45.6%.
Northwest Bancshares, Inc. (NWBI - Free Report) operates as a holding company for Northwest Bank. It currently carries a Zacks Rank #2. Although the company’s shares have underperformed its industry year to date, earnings estimates have moved up 2.8% over the past 30 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Grand Canyon Education, Inc. (LOPE - Free Report) , an education service provider in the United States, currently carries a Zacks Rank #3 (Hold). Although the stock has underperformed its industry over the past year, current-year earnings estimates have moved 1.9% north over the past 30 days. It has a three-five year expected EPS growth rate of 15%.
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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.
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