Analysts don’t add a stock to their coverage randomly. New coverage on a stock is usually the result of huge investor focus on it 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. 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 three of the five stocks that passed the screen:
Nova Measuring Instruments Ltd. (NVMI - Free Report) : This Rehovot, Israel-based company designs, develops, produces and sells process control systems used in the manufacture of semiconductors in Israel. The Zacks Rank #1 (Strong Buy) stock has gained 72.2% over the past three months compared with the industry’s 21.9% growth. The Zacks Consensus Estimate for its current-year earnings has risen 29.2% over the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Herc Holdings Inc. (HRI - Free Report) : Based in Bonita Springs, FL, this company operates as an equipment rental supplier primarily in the United States and internationally. This Zacks Rank #2 (Buy) stock has rallied 109.8% over the past three months compared with the industry’s 45.3% growth. The Zacks Consensus Estimate for its current-year earnings has risen 12.2% over the past 30 days.
GAN Limited (GAN - Free Report) : Based in London, the U.K., this company provides enterprise Software-as-a-Service solutions for online casino gaming and online sports betting applications. The Zacks Rank #3 (Hold) stock has gained 85.9% since its inception on May 5, 2020, outperforming the industry’s 28.9% growth.
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: 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