Most investors depend on analysts’ research before taking decisions as they fear that lack of information 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’ attention. 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 worth mentioning here that the average change in broker recommendation is always preferred over a single recommendation change.
Impact on Price Movement
The price movement of a stock generally depends on the recommendations on it from new analysts. Usually, stocks see an upward price movement on new analyst coverage compared to what was witnessed 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.
Below, we have selected three 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 of the six stocks that passed the screen:
Horizon Technology Finance Corporation (HRZN - Free Report) is a business development company. United States. Stock of this Zacks Rank #3 (Hold) company has gained 14.7% over the past year, outperforming its industry’s rally of 13.1%. Earnings estimates have moved 2.4% up for 2020 over the past 30 days, depicting analyst optimism over the stock’s potential.
Silvercorp Metals Inc. (SVM - Free Report) , also a Zacks Rank #3 company, engages in the acquisition, exploration, development, and mining of precious and base metal mineral properties in the Peoples Republic of China. The stock has gained 139.1% over the past year, outperforming its industry’s rally of 7.9%. Earnings estimates have moved 13.6% north over the past 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
JBG SMITH Properties (JBGS - Free Report) is a real estate company. Although shares of the company have underperformed the industry over the past year, earnings estimates have climbed 10.4% for 2020 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.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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