There’s no denying that the lack of consistency in information creates inefficiencies that might result in misinterpretation of stocks. Initiation of coverage by analysts offers critical information on a stock which is of great value to investors.
Coverage initiation on a stock by analyst(s) usually depicts increased investor inclination. Investors, on their part, often assume that there is something in the stock that has attracted analyst attention. In other words, they believe that the company coming under the radar definitely has some value which can be tapped into.
Obviously, stocks are not arbitrarily chosen to cover. New coverage on a stock usually reflects an encouraging future envisioned by the analyst(s). At times, increased investor focus on a stock motivates analysts to take a closer look at it.
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 nine stocks that passed the screen:
Gibraltar Industries Inc. ROCK, a leading manufacturer and distributor of building products, currently sports a Zacks Rank #1 (Strong Buy). Shares of Gibraltar have outperformed its industry. Earnings are expected to grow 17.2% for 2019. You can see the complete list of today’s Zacks #1 Rank stocks here.
Unisys Corporation UIS, a worldwide technology services and solutions company, currently carries a Zacks Rank #2 (Buy). Shares of Unisys have returned 43.7% in the past year against its industry’s 12.5% decline. Earnings are expected to grow 13.8% for 2019.
K12 Inc LRN, a Herndon, VA-based technology-based education company, currently carries a Zacks Rank #3 (Hold). Shares of K12 have returned 55.3% in the past year, outperforming its industry. Earnings are expected to grow 11.8% for the current fiscal year and 13.2% for the next.
Blue Hills Bancorp, Inc. BHBK, a holding company for Blue Hills Bank, has gained 13.6% in a year’s time, compared with 16.1% decline of its industry. This Zacks Rank #3 stock’s expected earnings growth rate for 2019 is 16.3%.
Independent Bank Corp. INDB, a bank holding company for Rockland Trust Company, has outperformed its industry over the past year. This Zacks Rank #3 stock is expected to witness 19% earnings growth in 2019.
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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