Many investors have utmost confidence in the research work of analysts as they fear that misinterpretations while researching on their own might trigger inefficiencies. 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 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 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 preferred over 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 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 gives a new recommendation on a company that has limited 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 15 stocks that passed the screen:
Movado (NYSE:MOV), one of the world’s premier watchmakers, has a Zacks Rank #1 (Strong Buy) and has seen its shares climb 53% this year, faring much better than the industry’s 22.6% increase. The company’s earnings are expected to grow 20.5% in the current year. The Zacks Consensus Estimate for current-year earnings has moved up 7.6% and 6.3% for the next over the last 60 days.
BRT Apartments (NYSE:BRT), a real estate investment trust, has gained 12.5% year to date, outperforming the 0.4% increase of its industry. This Zacks Rank #3 (Hold) stock has seen its earnings estimates move up 15.2% for the current fiscal and 5.7% for the next over the last 60 days. Earnings for the company are expected to grow 58.2% in the current fiscal.
Integer Holdings (NYSE:ITGR), a medical device outsource manufacturer worldwide, has outperformed its industry so far this year. While Integer Holdings has gained more than 48% so far this year, its industry has declined 14.9%. This Zacks Rank #2 (Buy) stock has seen its earnings estimates move up 1.3% for 2019, while remaining unchanged for 2018 over the last 60 days. Earnings for the company are expected to rise 19.9% in the current fiscal and 15.6% in the next.
Hollysys Automation Technologies (NASDAQ:HOLI), one of the leading automation systems providers in the People’s Republic of China, has outperformed its industry year to date. Although earnings estimates for the current year have remained stable, it moved upward for the next fiscal by 3.2% over the past 60 days. Earnings for the company are expected to grow 57.8% in the current fiscal and 22.1% in the next.
QuinStreet (NASDAQ:QNST), a Zacks Rank #3 stock, is a provider of online direct marketing and media services. Shares have climbed almost 76% this year, faring much better than the industry’s 20.3% increase. Although earnings estimates for the current year have remained stable, it moved upward for the next fiscal by 1.8% over the past 60 days. Earnings for the company are expected to grow 300% this fiscal.
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.
The Research Wizard is a great place to begin. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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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