As analysts are the most important information intermediaries in capital markets, initiation of coverage by them creates value for investors, avoiding any misinterpretation of stocks (over- or under-valued).
Coverage initiation on a stock by analyst(s) leads to increased investor enthusiasm. This is because investors tend to believe that the stock holds some value to have attracted analyst attention.
Of course, stocks are not randomly picked to cover. A new coverage on a stock is usually the result of a promising future envisioned by 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?
It has been noted that stocks typically see an incremental price movement with a new analyst initiating coverage compared to what they witness with a rating upgrade under an existing coverage. Of course, the price movement is a function of recommendations from new analysts. Positive recommendations – Buy and Strong Buy – generally lead to a significant positive price reaction than Hold recommendations. In this regard, analysts hardly initiate coverage with a Strong Sell or Sell recommendation.
However, one should also look for the average change in broker recommendation rather than a single recommendation change.
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 13 stocks that passed the screen:
Build-A-Bear Workshop, Inc. BBW is the only national company providing a make-your-own stuffed animal interactive retail-entertainment experience. The stock has returned more than 7% last month, compared with its industry’s 4.6%. The stock flaunts a Zacks Rank #2 (Buy) and a VGM Score of B. The stock saw positive earnings estimate revision of 17.8% for this year and 17.5% for 2018 over the past 60 days. It has an expected growth rate of 28.1% for 2017 and 26.7% for 2018.
Kura Oncology, Inc. KURA, a biopharmaceutical company, has climbed 89.4% in the last month, while the industry gained 9.9%. This Zacks Rank #2 stock has seen positive earnings estimate revisions for this year and the next over the past 30 days. The company has a solid average positive earnings surprise of 8.63% for the trailing four quarters.
Norsk Hydro ASA NHYDY, an aluminum company, has climbed 58.3% year to date, while the industry gained 15%. The stock carries a Zacks Rank #2 and has seen earnings estimates move up 4.4% for this year over the past 60 days Positive earnings estimate revisions for 2017 along with an expected earnings growth rate of 111.4% for 2017 indicates the stock’s potential for price appreciation.
Schnitzer Steel Industries, Inc. SCHN collects, processes and recycles metals by operating one of the largest metals recycling businesses in the United States. The stock has outperformed the industry, gaining 7.8% so far this year. The company has a solid earnings growth rate of 118.8% for the current year and 33.1% for the next year. The stock, with a Zacks Rank #3 (Hold), has seen earnings estimates move up 5.6% for this year and 25.6% for the next over the past 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
SYNNEX Corporation SNX is a global IT supply chain services company. The stock carries a Zacks Rank #2 and has a solid VGM Score of A. The company has an average positive surprise of 15.09% for the trailing four quarters, with four back-to-back beats. The company has a solid earnings growth rate of 14.7% for the current quarter and 19.8% for the year. The stock has gained 3% last month, outperforming its industry’s gain of 1.6%.
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.
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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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Synnex Corporation (SNX) : Free Stock Analysis Report
Kura Oncology, Inc. (KURA) : Free Stock Analysis Report
Norsk Hydro ASA (NHYDY) : Free Stock Analysis Report
Build-A-Bear Workshop, Inc. (BBW) : Free Stock Analysis Report
Schnitzer Steel Industries, Inc. (SCHN) : Free Stock Analysis Report
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