Many investors have immense faith in research work by analysts as they fear that lack of information while exploring on their own might trigger errors. 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 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 radar 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 needless to say, the average change in broker recommendation is more preferable than a single recommendation change.
How Does Analyst Coverage Influence 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 is 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 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.
Below, we have selected four 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 six stocks that passed the screen:
Electrameccanica Vehicles Corp. SOLO: Based in Vancouver, Canada, this is a development-stage company that develops, manufactures and sells electric vehicles in Canada. The stock has gained 267.1% over the past year, outperforming the industry’s 27.5% growth. This Zacks Rank #3 (Hold) company’s bottom line is expected to grow 32.1% in 2021. Loss estimates have narrowed to 36 cents per share from 39 cents over the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Software Acquisition Group Inc. CURI: Based in Silver Spring, MD, Software Acquisition Group operates as a media and entertainment company. This Zacks Rank #3 (Hold) company’s shares have increased 66.23% over the past year, outperforming its industry’s 2.4% growth. The company’s bottom line is expected to grow 64.4% in 2021.
Palantir Technologies Inc. PLTR: Headquartered in Denver, CO, this company builds and deploys software platforms for the intelligence community in the United States. Shares of this company have rallied 168.4% since its inception on Sep 30 last year, outperforming its industry’s 24.7% growth. This Zacks Rank #3 company’s earnings for 2021 are expected to increase 88.9%.
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
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ElectraMeccanica Vehicles Corp. (SOLO) : Free Stock Analysis Report
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