As analysts are the most important information intermediaries in capital markets, initiation of coverage by them creates value for companies.
In this regard, it is to be kept in mind that that the lack of consistency in information creates inefficiencies that might result in misinterpretation of stocks (over- or under-valued). Thus, initiation of coverage by analysts offers critical information on a stock which is of great value to investors.
Coverage initiation of a stock by analyst(s) usually portrays higher investor inclination. Investors, on their part, often assume there is something special in a stock to attract analysts’ attention. In other words, they believe that the company coming under coverage 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 worth mentioning here that the average change in broker recommendation is always preferred over a single recommendation change.
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 five of the 10 stocks that passed the screen:
Logitech International S.A. LOGI, the manufacturer of innovative peripherals that helps people to connect to digital platforms, returned 54.7% year to date, outperforming the Zacks classified Computer-Peripheral Equipment industry’s 30.3% gain. Logitech International surpassed the Zacks Consensus Estimate in all the prior four quarters at an average of 94.10%. The stock sports a Zacks Rank #1 (Strong Buy).
Herman Miller, Inc. MLHR, engaged in the research, design, manufacture, and distribution of office furniture systems, has outperformed the Zacks classified Business/Office products industry so far this year. This Zacks Rank #1 stock has witnessed 5.5% upward revision in broker ratings over the past four weeks for the current fiscal year and 6% for the next. You can see the complete list of today’s Zacks #1 Rank stocks here.
Diodes Incorporated DIOD is a semiconductor products manufacturer. This Zacks Rank #3 (Hold) stock has seen earnings estimates move up by 25% for this year and 8.7% for the next over the past 60 days. Positive earnings estimate revisions for 2017 and 2018 along with an expected earnings growth rate of 62.3% for 2017 and 20% for the next indicate the stock’s potential for price appreciation.
Willdan Group Inc. WLDN is a provider of professional technical and consulting services to utilities, private industry, and public agencies at all levels of government. This Zacks Rank #3 stock has climbed 46% year to date, while the Zacks categorized Engineering/R&D Services industry fell 7.4%. The company has a solid average positive earnings surprise of 66.05% in the trailing four quarters and an estimated earnings growth rate of 17% for this year.
Kindred Biosciences Inc. KIN is a development-stage biopharmaceutical company focused on saving and improving the lives of pets. This Zacks Rank #2 (Buy) stock has rallied 80.6% year to date, significantly outperforming the Zacks Medical-Biomedical/Genetics industry’s 8.7% rise. Its average EPS surprise over the last four quarters is 24.78%.
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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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Logitech International S.A. (LOGI) : Free Stock Analysis Report
Diodes Incorporated (DIOD) : Free Stock Analysis Report
Willdan Group, Inc. (WLDN) : Free Stock Analysis Report
Kindred Biosciences, Inc. (KIN) : Free Stock Analysis Report
Herman Miller, Inc. (MLHR) : Free Stock Analysis Report
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