New analyst coverage provides extensive data on stocks for investors. Analysts are privy to vital information, which is crucial for investment decisions. Lack of information creates chances of misinterpretation of stocks (over- or under-valued).
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.
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 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 ratings on stocks under continuous coverage. Needless to say, the average change in broker recommendation is preferred over a single recommendation change.
Impact on Price Movement
The price movement of a stock generally depends on the recommendations on it from new analysts. Usually, stocks see an upward price movement on new analyst coverage compared to what was 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 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.
Below, we have selected four stocks that have seen increased analyst coverage over the last few weeks.
Screening Criteria
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 four of 11 stocks that passed the screen:
Stamps.com Inc.
STMP
: Headquartered in El Segundo, CA, this company provides Internet-based mailing and shipping solutions in the United States and Europe and carries a Zacks Rank #1 (Strong Buy). The stock has gained 198.4% over the past year, outperforming the
industry
’s 42.4% growth. The stock has an impressive earnings surprise history, beating the Zacks Consensus Estimate in the trailing 12 quarters, the average being 116.7%. You can see
the complete list of today’s Zacks #1 Rank stocks here
.
Ribbon Communications Inc.
RBBN
: Based in Westford, MA, this company provides networked software solutions in the United States and abroad. The stock has gained 258.2% over the past year, outperforming the
industry
’s 92% growth. This Zacks Rank #3 (Hold) company’s earnings are expected to grow 26.9% in 2021.
American Software, Inc.
AMSWA
: This Atlanta, GA-based company develops, markets, and supports a range of computer business application software products and services in the United States and internationally. The stock carries a Zacks Rank #3 and has gained 29% over the past year, outperforming its
industry
’s 28% growth.
EyePoint Pharmaceuticals, Inc.
EYPT
: Headquartered in Watertown, MA, this specialty biopharmaceutical company carries a Zacks Rank #3. Although this stock has underperformed its
industry
in the past year, loss estimates have narrowed down to $1.62 per share from $1.55 over the past 60 days for 2021, depicting analyst optimism over the company’s earnings growth potential.
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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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