New analyst coverage unearths extensive data on stocks for investors. Analysts are privy to vital information, which is crucial for investment decisions. Lack of information creates chances of misinterpretation of stocks (over- or under-valued).
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.
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 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 preferred over 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 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 more 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 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 six stocks that passed the screen:
Shenandoah Telecommunications Company SHEN, a telecommunications service provider, currently carries a Zacks Rank #1 (Strong Buy). Shares of Shenandoah have returned 54.7% in the past year against its industry’s 11.3% decline. Earnings are expected to grow 51.7% for 2019. You can see the complete list of today’s Zacks #1 Rank stocks here.
Honda Motor Co., Ltd. HMC, which develops, manufactures, and distributes motorcycles, automobiles, power products, and other products worldwide, currently carries a Zacks Rank #2 (Buy). Shares of Honda Motor have outperformed its industry. Earnings estimates have risen 4.3% for the current year over the past 30 days, depicting analysts’ optimism over the stock’s earnings growth potential.
PolarityTE, Inc. PTE, a biotechnology and regenerative biomaterials company, currently carries a Zacks Rank #3 (Hold). Although shares of PolarityTE have underperformed its industry in a year’s time, estimates have been trending upward over the past 30 days for the current fiscal year. Earnings are expected to grow 15.4% for the current fiscal.
Ubiquiti Networks, Inc. UBNT, a computer networking company, carries a Zacks Rank #3. Shares of Ubiquiti have broadly outperformed its industry. Earnings estimates have risen 6.6% for the current year over the past 30 days, depicting analysts’ optimism over the stock’s earnings growth potential. Earnings are expected to grow 19% for the current fiscal year.
Titan Machinery Inc. TITN, which owns and operates a network of full-service agricultural and construction equipment stores, currently carries a Zacks Rank #3. Shares of Titan Machinery have outperformed its industry in a year’s time. Earnings are expected to grow 41.2% for fiscal 2020. Earnings estimates have increased 7.5% for the current year over the past 60 days.
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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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Titan Machinery Inc. (TITN) : Free Stock Analysis Report
Ubiquiti Networks, Inc. (UBNT) : Free Stock Analysis Report
Shenandoah Telecommunications Co (SHEN) : Free Stock Analysis Report
Honda Motor Co., Ltd. (HMC) : Free Stock Analysis Report
Majesco Entertainment Company (PTE) : Free Stock Analysis Report
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