Most investors depend on analysts’ research before taking decisions as they fear that lack of information 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’ attention. 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 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 generally depends on the recommendations on it from new analysts. Usually, 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.
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.
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 eight stocks that passed the screen:
Diodes Incorporated DIOD, a semiconductor products manufacturer, returned 6.9% in the last three months, outperforming the Zacks classified Electronics - Semiconductors industry’s 2.5% gain. Over the last 60 days, the Zacks Consensus Estimate for earnings rose by 37 cents to $1.25 for 2017 and 25 cents to $1.50 for 2018. 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 further price appreciation. The stock sports a Zacks Rank #1 (Strong Buy).
Cutera Inc. CUTR designs, develops, manufactures and markets the CoolGlide family of products for use in laser and other light-based aesthetic applications. This Zacks Rank #2 (Buy) stock has climbed 49.3% so far this year, outperforming the Zacks Lasers-Systems/Components industry’s 37.5% gain. The company has an expected earnings growth rate of 136.8% for 2017 and 54.4% for 2018.
International Seaways, Inc. INSW is one of the leading tanker companies worldwide, providing energy transportation services for crude oil and petroleum products in International Flag markets. The company’s stock price has rallied 54.3% so far this year, comparing favorably with the Zacks Transportation-Ship industry’s 4.5% drop. The company – with a Zacks Rank #3 (Hold) – has seen positive earnings estimate revisions of 67 cents for this year and 14 cents for the next over the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Kindred Biosciences Inc. KIN is a development-stage biopharmaceutical company focused on saving and improving the lives of pets. This Zacks Rank #2 stock has rallied 102.3% year to date, significantly outperforming the Zacks Medical-Biomedical/Genetics industry’s 6.4% rise. Its average EPS surprise over the last four quarters is 24.78%.
Cymabay Therapeutics, Inc. CBAY, a biopharmaceutical company, skyrocketed 233% year to date, faring much better than the Zacks Medical-Generic Drugs industry’s 0.3% drop. The company is expected to report 39.5% EPS growth rate this year and 15.5% for the next. The company carries a Zacks Rank #3.
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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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