Most investors have immense faith in research work by analysts as they fear that lack of information while exploring on their own 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 to cover it. 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 needless to say, the average change in broker recommendation is more preferable than 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 is 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.
So, it’s a good strategy to bet on stocks that have seen increased analyst.
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 10 stocks that passed the screen:
Napco Security Technologies, Inc. NSSC, a manufacturer and seller of security products and software worldwide, currently carries a Zacks Rank #1 (Strong Buy). Shares have gained 57.8% year to date, outperforming its industry’s rally of 31.2%. The company's earnings estimates have risen 11.9% for the current year over the past 60 days, depicting analyst optimism over the stock’s earnings potential. You can see the complete list of today’s Zacks #1 Rank stocks here.
iQIYI, Inc. IQ, an online entertainment service provider under the iQIYI brand in China, currently has a Zacks Rank #2 (Buy). Shares of the company have gained 39.4% year to date, outperforming its industry’s rise of 11%. The company's loss estimates have narrowed to $1.38 per share from $1.64 for the current year over the past 60 days.
Village Farms International, Inc. VFF, a producer, marketer and distributor of greenhouse-grown tomatoes, bell peppers and cucumbers primarily in North America, currently carries a Zacks Rank #3 (Hold). Village Farms’ earnings estimates have risen 40% for the current year over the past 30 days.
Plantronics, Inc. PLT, a global leader in audio communications for businesses and consumers, currently carries a Zacks Rank #3. Although the company’s shares have underperformed its industry year to date, the stock has solid growth potential. The company’s earnings for the current year are expected to grow 17.6%.
Aerojet Rocketdyne Holdings, Inc. AJRD designs, develops, manufactures, and sells aerospace and defense products and systems in the United States. The stock currently carries a Zacks Rank #3 and its shares have gained 27.7% year to date, compared with its industry’s rally of 30.3%. The company's earnings estimates have risen 18.4% for the current year over the past 90 days.
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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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