At a time when coronavirus-hit economic data (weak retail sales and industrial production) has been tarnishing investors’ sentiments, proposal for new stimulus, reopening of the economy and improving prospects of a vaccine have been instilling optimism. In such a scenario, investors may look for stocks that recently came under new analyst coverage. This is because analysts don’t initiate coverage on a stock randomly. New coverage is usually the result of huge investor focus on a stock or its promising prospects.
Interestingly, stocks typically see an incremental upward price movement with new analyst coverage compared to what they witness with continuation of existing analyst coverage. Of course, the price movement depends on the recommendations from the new analysts. Positive recommendations — Buy and Strong Buy — lead to a significant positive incremental price reaction than Strong Sell, Sell or Hold recommendations.
Moreover, if an analyst gives a new recommendation on a company that has limited or no analyst coverage, investors start paying more attention to it. As analysts almost always initiate coverage with a positive recommendation. Also, any new information attracts portfolio managers to build a position in the stock.
However, one should preferably look for the average change in broker recommendation rather than a single recommendation change. Then again, an upgrade, an initiation or even increased coverage is equally important.
Keeping this mind, it’s a good strategy to focus on the number of analyst recommendations that have increased 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 four of the eight stocks that passed the screen:
Aeglea BioTherapeutics, Inc. (AGLE - Free Report) : This is an Austin, TX-based clinical-stage biotechnology company. It currently sports a Zacks Rank #1 (Strong Buy). Although shares of Aeglea have marginally underperformed its industry year to date, its loss estimate has narrowed to $1.71 per share from $2.74 per share over the past 30 days, depicting analyst optimism over the stock’s potential. Its bottom line is expected to improve 30.2% in the current year.
VeriSign, Inc. (VRSN - Free Report) : This Reston, VA-based company provides domain name registry services and Internet infrastructure. It currently has a Zacks Rank #1. Although shares of the company have marginally underperformed its industry year to date, the Zacks Consensus Estimate for its current-year earnings has risen 27.3% over the past 30 days. It has an expected earnings growth rate of 24.7% for the current year.
Sequans Communications S.A. (SQNS - Free Report) : Headquartered in Paris, France, this company operates as a fabless designer, developer and supplier of 4G semiconductor solutions for wireless broadband applications. It currently carries a Zacks Rank #2 (Buy) and its shares have gained 67.3% year to date against the industry’s 7.9% decline. It has an expected earnings growth rate of 26.9% for the current year and 57.9% for the next. You can see the complete list of today’s Zacks #1 Rank stocks here.
New Jersey Resources Corporation (NJR - Free Report) : Based in Wall, NJ, this is an energy services holding company. It currently carries a Zacks Rank #2 and has outperformed its industry year to date. The Zacks Consensus Estimate for its current-year earnings has risen 0.5% over the past 30 days. It has an expected earnings growth rate of 7.7% for the current year and 10.2% for the next.
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: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance