As analysts are one of the most important information intermediaries in capital markets, initiation of coverage by them creates value for companies.
It is to be borne in mind that discrepancy in information creates inefficiencies that might result in the misinterpretation of stocks (over- or under-valued). Thus, initiation of coverage by analysts offers critical information on a stock.
Coverage initiation on a stock by analyst(s) 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 radar definitely has some value which can be tapped into.
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.
However, we have noticed that the average change in broker recommendation is preferred over a single recommendation change.
Analyst Coverage & Price Movement
Interestingly, the price movement is generally a function of the recommendations 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 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 10 stocks that passed the screen:
JBG SMITH Properties (JBGS - Free Report) , a Zacks Rank #1 (Strong Buy) company, owns, operates, invests in and develops a dynamic portfolio of high quality mixed-use properties in and around Washington, DC. Although shares of the company have underperformed its industry year to date, earnings estimates have moved 10.4% up for 2020 over the past 60 days, depicting analysts’ optimism over the stock’s potential.
Northwest Bancshares, Inc. (NWBI - Free Report) operates as a holding company for Northwest Bank that offers various personal and business banking solutions. Shares of this Zacks Rank #2 (Buy) company have declined 1.6% year to date, underperforming its industry’s rally of 26.1%. Nonetheless, its earnings estimates have risen 1.9% for 2020 over the past 60 days.
The Hanover Insurance Group, Inc. (THG - Free Report) , also a Zacks Rank #2 company, provides various property and casualty insurance products and services in the United States. Shares of the company have gained 16.3% year to date, outperforming its industry’s rally of 12.3%. Earnings estimates have moved 0.6% up for 2020 over the past 30 days.
Hepion Pharmaceuticals, Inc. (HEPA - Free Report) , a Zacks Rank #3 (Hold) stock, is a biopharmaceutical company. Although shares of the company have underperformed its industry year to date, loss estimates have narrowed for 2020 to $1.42 per share from $1.75 over the past 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Heidrick & Struggles International, Inc. (HSII - Free Report) , currently carrying a Zacks Rank #3, provides executive search and consulting services to businesses and business leaders in the Americas, Europe, the Asia Pacific, and internationally. Although shares of the company have underperformed its industry year to date, its earnings estimates have moved 1.5% north for 2020 over the past 60 days.
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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