Most investors have immense confidence in the research work of analysts as they fear that misinterpretations while exploring on their own might trigger inefficiencies. Here, analysts play a vital intermediary role with their extensive access to relevant data.
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 of Analyst Coverage 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 11 stocks that passed the screen:
Methode Electronics, Inc. MEI), a global manufacturer of electronic components and subsystems, currently carries a Zacks Rank #1 (Strong Buy). The company’s shares have gained 18.9% over the past three months, outperforming its industry’s 16.8% growth. Earnings estimates have advanced 20.2% over the past 30 days for the current year, depicting analysts’ optimism over the stock’s earnings potential. You can see the complete list of today’s Zacks #1 Rank stocks here.
Walker & Dunlop, Inc. WD, a commercial real estate financial services provider, currently sports a Zacks Rank #1. Shares of Walker & Dunlop have returned 16.6% over the past three months against its industry’s 25.5% decline. That said, earnings estimates have risen 4.2% for the current fiscal year over the past 60 days.
Marker Therapeutics, Inc. MRKR, a clinical-stage immuno-oncology company, carries a Zacks Rank #3 (Hold). The company’s shares have risen 20.9% over the past three months, outperforming its industry’s 16.5% growth. The company’s loss estimates have narrowed down to 50 cents per share from 61 cents over the past 30 days for the current year.
Chemed Corporation CHE, the largest provider of end-of-life hospice care services through its VITAS Healthcare Corporation subsidiary, carries a Zacks Rank #2. Shares of Chemed have returned 12.7% over the past three months compared with its industry’s 4.3% gain. Earnings estimates for the current year have climbed 1% over the past 60 days.
Olympic Steel, Inc. ZEUS processes and distributes metal products in the United States and internationally. Shares of this Zacks Rank #3 company have gained 12.3% over the past three months compared with its industry’s rise of 7.3%. Earnings estimates for the current year have moved 13.5% up over the past 30 days.
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.
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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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Methode Electronics, Inc. (MEI) : Free Stock Analysis Report
Walker & Dunlop, Inc. (WD) : Free Stock Analysis Report
Chemed Corporation (CHE) : Free Stock Analysis Report
Olympic Steel, Inc. (ZEUS) : Free Stock Analysis Report
MARKER THERAPEUTICS, INC. (MRKR) : Free Stock Analysis Report
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