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Fight Back Against Inflation with New Analyst Coverage

·6 min read

Investors don’t have to wait much longer before they get official word on the Federal Reserve’s next rate hike. Even though Jay Powell hasn’t said exactly what the Fed will do just yet, Wall Street is sure that it will raise its key interest rate by at least 0.75% for a third-straight time when its two-day FOMC meeting ends on Wednesday.

There is now even a growing chance that the central bank will lift by a full 1% after inflation remained stubbornly high in August. Powell views sustained or entrenched inflation as a massive threat to the U.S. and is willing to cause short-term economic pain in order to bring prices down.

The Fed’s task is far from easy since an array of factors are fueling higher costs, many of which are out of its control. The Fed’s hawkish stance on rates and a flight to safety amid global economic slowdown worries are pushing 10-year U.S. Treasury yields to fresh decade-long highs of nearly 3.6%.

Even with all of the turmoil and economic uncertainty, investors might want to hunt for strong stocks because staying in cash comes with a cost.

Today we utilized our new analyst coverage screen to help investors find stocks that are gaining more attention from Wall Street analysts that could be potential winners in the fourth quarter of 2022 and beyond.

New Analyst Coverage

Broker recommendations play their part no matter how investors feel about them. And we seemingly all take a look no matter what. Individual investors, large institutional portfolio managers, and everyone in between are likely pleased to see one of their stocks get an upgraded rating or a new analyst cover the company.

Investor interest can generate more analyst coverage. This helps explain why analysts jump on young, much-hyped and talked about tech companies. Then, as new coverage is initiated, the company and the stock become more visible, which in turn often leads to more demand potential and therefore the possibility of higher prices. 

Plus, analysts almost always initiate coverage with a positive recommendation. And the logic follows because why spend all the time and write a research report on a company not widely tracked only to say it’s not good?

When it comes to companies with little to no analyst coverage, one new recommendation can sometimes give portfolio managers the validation they need to build a position. And the more money they can invest, the more they can potentially influence prices.

The best way to use this information is to search for companies with analyst coverage that has increased over the last 4 weeks. We just look at the number of analyst recommendations today and compare it to the number of analyst recommendations 4 weeks ago.

The rule of thumb here is that an increase in coverage leans bullish and a decrease signals bearish behavior. It is also worth pointing out that, in general, the change in the average broker recommendation is a better indicator than the actual recommendation itself.

On top of that, it is typically more bullish if the increase went from none to one or if the coverage was minimal to begin with. (As the number of analysts climbs the addition of new coverage isn’t earth-shattering.) In the end, increased coverage is still better than decreased coverage, unless the coverage is heading in the wrong direction. 

Now let’s try this screen…

• Number of Broker Ratings now greater than the Number of Broker Ratings four weeks ago

(This shows stocks where new coverage has recently been added.)

• Average Broker Rating less than Average Broker Rating four weeks ago

(By 'less than', we mean 'better than' four weeks ago.)

• Prices greater than or equal to 5

(We’re applying all of the above parameters to stocks above $5 a share since many money managers won't even look at stocks under $5)

• Average Daily Volume greater than or equal to 100,000 shares

(If there's not enough volume, even individual investors won't want it).

Here are two of the 13 stocks that came through the screen today…

Napco Security Technologies, Inc. NSSC - (from 2 analysts four weeks ago to 4)

Napco Security Technologies designs and builds high-tech electronic security devices, wireless recurring communication services, and more for intrusion, fire alarm systems, and beyond. The company is also a top provider of school safety solutions. Overall, NSSC’s business consists of NAPCO, alongside three other wholly owned subsidiaries that includes Alarm Lock. Napco Security’s offerings are used in commercial, industrial, institutional, residential, and government applications.

Napco Security stock has managed to climb 20% so far this year to outshine its industry and the market. NSSC, which trades for around $30 per share at the moment, is up 1,600% in the past decade to blow away its peers and the S&P 500. This includes a 120% run in the last three years.

Napco Security has also blown away our bottom lines estimates in the last two quarters. Plus, Zacks estimates call for its revenue to climb around 17% both this year and next. Its adjusted earnings are expected to soar 65% this year and 61% next year, as its offerings resonate more than ever with its diverse clientele. And its positive earnings revisions help it land a Zacks Rank #2 (Buy) right now.

AVEO Pharmaceuticals AVEO - (from 2 analysts four weeks ago to 3)

AVEO Pharmaceuticals is a commercial-stage, oncology-focused biopharmaceutical firm. AVEO currently markets FOTIVDA (tivozanib) in the U.S. for the treatment of adult patients with relapsed or refractory renal cell carcinoma (RCC) following two or more prior systemic therapies. AVEO continues to develop FOTIVDA and has other offerings in its pipeline as well.

The biopharmaceutical company provided upbeat guidance when it reported its results in early August, with its positive EPS revisions helping it land a Zacks Rank #2 (Buy). AVEO is now projected to cut its adjusted loss significantly this year and then swing from an expected -$0.94 per share all the way to +$0.41 in FY23. AVEO’s revenue is projected to soar by 166% in FY22 and another 63% in FY23.

AVEO Pharmaceuticals stock is up 20% in the trailing 12 months, which includes a 65% surge off the market’s mid-June lows. And its current average Zacks price target offers 100% upside to the roughly $8 per share it trades at right now.

Many screeners won't let you search for the number of analysts covering a stock, let alone comparing the amount of coverage they had weeks or even months ago. But you can with the Research Wizard. And you can backtest it all. Find out how to pick the right stocks right now by taking a free trial to the Research Wizard stock picking and backtesting program.

Click here to sign up for a free trial to the Research Wizard today.

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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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