The importance of new analyst coverage is evident from the extensive data it unearths for investors. Analysts are privy to vital information and are crucial to investment decisions.
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 microscope definitely holds some value.
Do analysts create value for companies by initiating coverage? Of course they do because they play an important intermediary role with their extensive access to relevant data. Many investors have immense faith in analysts’ research as they fear that lack of information might trigger inefficiencies.
Obviously, stocks are not randomly chosen to cover. A new coverage on a stock usually reflects a reassuring future envisioned by the analyst(s). At times, increased investor focus on a stock motivates analysts to take a closer look at it. After all, who doesn’t like 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.
Needless to say, the average change in broker recommendation is more preferable than a single recommendation change.
Impact on 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 new analyst coverage compared to what they witness 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 issues 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 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).
The number of 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 five of the nine stocks that passed the screen:
Heritage Commerce Corp. HTBK is the holding company of Heritage Bank of Commerce, Heritage Bank East Bay, Heritage Bank South Valley and Bank of Los Altos. This Zacks Rank #2 (Buy) stock rallied approximately 46.4% in the last one year, outperforming the Zacks categorized Banks-West industry. Its expected EPS growth rate for 3–5 years is pegged at 10% and earnings for the current year are expected to increase 51%.
Comfort Systems USA Inc. FIX is a national provider of comprehensive heating, ventilation and air conditioning installation, maintenance, repair and replacement services in the U.S. The stock currently has a Zacks Rank #3 (Hold) and a VGM score of ‘B’. Also, the 3–5 year EPS growth rate for the stock is estimated at 10%.
Emcor Group Inc. EME is one of the leading providers of mechanical and electrical construction, industrial and energy infrastructure, and building services for a diverse range of businesses. It has a VGM score of “B”. Its expected EPS growth rate for 3–5 years is pegged at 15%. The stock rallied 57.9% in the last one year, outperforming 44.3% growth of the Zacks categorized Building- Heavy Construction industry.
Emcor currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Sterling Construction Company, Inc. STRL is a heavy civil construction company in Texas, Utah, Nevada, Colorado, Arizona, California, Hawaii, and other states in the U.S. This is a Zacks Rank #3 stock that flaunts a VGM Score “A”. Moreover, the stock gained over 77% in the last one year.
Magnachip Semiconductor Corp. MX operates as a designer and manufacturer of analog and mixed-signal semiconductor products for high-volume consumer applications. The stock sports a Zacks Rank #1 and has climbed almost 65% in the last one year, outperforming the broader industry growth of 43.5%.
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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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Heritage Commerce Corp. (HTBK): Free Stock Analysis Report
Comfort Systems USA Inc. (FIX): Free Stock Analysis Report
Emcor Group Inc. (EME): Free Stock Analysis Report
Sterling Construction Co. (STRL): Free Stock Analysis Report
Magnachip Semiconductor Corp. (MX): Free Stock Analysis Report
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