Many 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 14 stocks that passed the screen:
Kraton Corp (NYSE:KRA) makes styrenic block copolymers, specialty polymers and performance products derived from pine wood pulping co-products. The stock has climbed 42.6% year to date, while the industry gained 10.3%. The stock carries a Zacks Rank #1 (Strong Buy) and has seen earnings estimates move up 2.4% for this year and 4.5% for 2018 over the past 60 days. Positive earnings estimate revisions for 2017 and 2018 indicate the stock’s potential for price appreciation.
aTyr Pharma Inc (NASDAQ:LIFE), a bio-therapeutics company, has gained more than 155% this year, compared with its industry’s 14.1%. The company’s current year as well as next year’s loss estimates have narrowed over the last 60 days.
Grupo Financiero Galicia S.A. (NASDAQ:GGAL), a financial and investment services holding company, has returned more than 96% so far this year, compared with its industry’s 19.4%. The stock carries a Zacks Rank #3 (Hold) and it has an expected growth rate of 15% for 2017 and 12.7% for 2018.
Grupo Supervielle S.A. (NYSE:SUPV) is a private domestically-owned financial group. The stock has gained almost 82% year to date, compared with its industry’s 19.4%. The stock holds a Zacks Rank #3 and a VGM Score of A. It saw positive earnings estimate revision of 2.3% for this year and 2.2% for 2018 over the past 30 days. It has an expected growth rate of 28.4% for 2017 and 31.1% for 2018.
Calithera Biosciences Inc (NASDAQ:CALA) is a clinical-stage pharmaceutical company. The stock has skyrocketed 433.9% year to date, significantly outperforming the industry’s 3.1% gain. Loss estimates have narrowed to 88 cents from 96 cents for 2017 over the last 60 days, with an expected growth rate of a 54.9%. The stock has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
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.
The Research Wizard is a great place to begin. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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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