The importance of new analyst coverage is evident from the extensive data it unearths for investors. Analysts are privy to vital information, which is crucial for taking investment decisions.
Coverage initiation on a stock by analyst(s) usually portrays higher investor inclination. Investors, on their part, often assume that 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 holds some value.
Do analysts create value for companies by initiating coverage? Of course they do because they play an important intermediary role with their extensive access to relevant data. Many investors have immense faith in analysts’ research as they fear that lack of information might trigger inefficiencies.
Obviously, stocks are not randomly chosen to cover. A new coverage on a stock usually reflects a reassuring future envisioned by the analyst(s). At times, increased investor focus on a stock motivates analysts to take a closer look at it. After all, who doesn’t like 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.
Needless to say, the average change in broker recommendation is more preferable than a single recommendation change.
Impact on 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 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 issues 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 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 16 stocks that passed the screen:
Ellington Financial Inc. EFC, a Zacks Rank #1 (Strong Buy) company, acquires and manages mortgage-related, consumer-related, corporate-related, and other financial assets in the United States. Shares of the company have gained 20.2% year to date, underperforming its industry’s rally of 38.7%. Its earnings estimates have risen 4.1% for the current year over the past seven days, depicting analysts’ optimism over the company’s earnings growth potential. The company’s earnings for the current year are expected to grow 26.2%.
Diamond S Shipping Inc. DSSI, also a Zacks Rank #1 company, operates as a shipping company. Shares of the company have gained 20.4% in the past six months, outperforming its industry’s rally of 9.9%. Earnings estimates have moved 306.5% up for the current year over the past seven days.
Progress Software Corporation PRGS is a Zacks Rank #2 (Buy) company, which develops business applications worldwide. Although shares of Progress Software have underperformed its industry year to date, its earnings estimates have risen 2.3% for the current year over the past 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Opera Limited OPRA, also a Zacks Rank #3 (Hold) company, provides mobile and PC web browsers in Ireland, Russia and internationally. Shares of the company have gained 77.2% year to date, outperforming its industry’s rally of 4%. Earnings estimates have moved 52.6% up for the current year over the past 60 days.
Shenandoah Telecommunications Company SHEN, a Zacks Rank #3 (Hold) company, primarily provides wireless, cable, and wireline telecommunications services to customers and other telecommunications providers. Shares of the company have gained 14.5% year to date, outperforming its industry’s rally of 6%. The company’s earnings for the current year are expected to grow 24.7%.
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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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Shenandoah Telecommunications Co (SHEN): Free Stock Analysis Report
Progress Software Corporation (PRGS): Free Stock Analysis Report
Ellington Financial LLC (EFC): Free Stock Analysis Report
Diamond S Shipping Inc. (DSSI): Free Stock Analysis Report
Opera Limited Sponsored ADR (OPRA): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.