As analysts are the key information intermediaries in capital markets, initiation of coverage by them offers critical information on a stock and is of great value to investors.
Coverage initiation by analyst(s) on a stock portrays higher investor inclination. Investors, on their part, often assume that there is something special in a stock to attract analysts’ interest. In other words, they believe that a company coming under coverage has value that can’t be ignored.
Obviously, stocks are not randomly chosen to cover. New coverage 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 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.
New Analyst Coverage & Impact on Price Movement
The price movement of a stock is the function of the recommendations on it from new analysts. Typically, 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.
Meanwhile, investors start paying more attention to the stock (that has very few or no existing coverage) on which an analyst provides a new recommendation. Also, any new information attracts portfolio managers to build a position in the stock.
Below, we have selected five 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 four of the nine stocks that passed the screen:
QuinStreet, Inc. QNST, a provider of online direct marketing and media services, has seen its shares climbing more than 61% year to date, faring much better than the industry’s 25.2% increase. This Zacks Rank #1 (Strong Buy) stock has seen its earnings estimates move up 25% for the current fiscal year and 16.7% for the next, over the last 60 days. Earnings for the company are expected to grow 309.1% in the current fiscal and 25.6% for the next. You can see the complete list of today’s Zacks #1 Rank stocks here.
Hollysys Automation Technologies Ltd. HOLI, one of the leading automation systems providers in the People's Republic of China, holds a Zacks Rank #2 (Buy). Shares of the company have outperformed its industry so far this year and its estimates remained stable over the last 60 days for the current fiscal year. The company’s earnings are expected to grow 57.8% this fiscal (higher than the industry average of 25.1%) and 22.1% in the next.
ION Geophysical Corporation IO is a leading provider of geophysical technology, services, and solutions for the global oil & gas industry. Shares of the company have climbed 8.4% this year, faring better than the industry’s 6.6% growth. This Zacks Rank #3 (Hold) stock has seen its earnings estimates move up 72.7% for 2018, over the last 60 days. Earnings for the company are expected to grow 111.8% in 2018.
ZTO Express (Cayman) Inc. ZTO is an express delivery company and its shares have gained 23.8% year to date, outperforming its industry’s 6.9% increase. Earnings estimates have remained stable over the last 60 days for the current year but moved north by 1.9% for 2019, depicting the stock’s potential to scale higher.
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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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ZTO EXPRESS INC (ZTO) : Free Stock Analysis Report
QuinStreet, Inc. (QNST) : Free Stock Analysis Report
Hollysys Automation Technologies, Ltd. (HOLI) : Free Stock Analysis Report
Ion Geophysical Corporation (IO) : Free Stock Analysis Report
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