Analysts provide extensive information on companies that they cover through formal reports, projections, recommendation revisions as well as via research notes. 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 on 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).
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 11 stocks that passed the screen:
LAKELAND BANCORP INC. LBAI, a bank holding company engaged in general banking business, has climbed 69.7% in the last one year, outperforming the Zacks classified Banks-Northeast industry’s 30.5% gain. The Zacks Rank #2 (Buy) stock saw positive earnings estimate revision of 3 cents for this year over the past 30 days, with an expected growth rate of 6.4%.
Daqo New Energy Corp. DQ is engaged in the manufacture and sale of high-quality polysilicon to photovoltaic product manufacturers. The stock climbed 26.8% in the last one month, outperforming the Zacks classified Chemicals-Specialty industry’s 1.2% gain. The stock saw positive earnings estimate revision of 29.7% for this year and 4.5% for the next over the past 30 days. This Zacks Rank #3 (Hold) stock has a VGM Score of ‘A’.
China Lodging Group, Limited HTHT, an economy hotel chain operator in China, sports a Zacks Rank #1 (Strong Buy). Estimates moved north by 11 cents over the last 30 days to $2.14 per share for the current year, with an expected growth rate of 30.5%. The stock has rallied 44.6% so far this year, outperforming the Hotels & Motels industry’s 0.5% gain. You can see the complete list of today’s Zacks #1 Rank stocks here.
Electro Scientific Industries, Inc. ESIO provides electronics manufacturers with equipment necessary to produce key components used in wireless telecommunications, computers, automotive electronics, and many other electronic products. With a Zacks Rank #3, the stock has climbed 40.5% so far this year, faring better than the Zacks Lasers-Systems/Components industry’s 26.6% rise. The company is expected to register 83.5% EPS growth in the current year and 252.6% in the next.
Adesto Technologies Corp. IOTS provides application-specific non-volatile memory products. The Zacks Rank #3 stock has skyrocketed 173% so far this year, outperforming the Zacks Internet Software/Services industry‘s 24.8% increase. The company is expected to witness 57.3% EPS growth in the current year and 37.1% in the next.
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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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Adesto Technologies Corporation (IOTS): Free Stock Analysis Report
Lakeland Bancorp, Inc. (LBAI): Free Stock Analysis Report
DAQO New Energy Corp. (DQ): Free Stock Analysis Report
China Lodging Group, Limited (HTHT): Free Stock Analysis Report
Electro Scientific Industries, Inc. (ESIO): Free Stock Analysis Report
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