A lack of information creates inefficiencies that might result in stocks being misrepresented (over- or under-valued). Here, analysts play a vital role in investment decisions as they provide significant data. So, investors look forward to coverage initiation of stocks.
Coverage initiation of a stock by analyst(s) usually depicts bigger 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 arbitrarily chosen to cover. A new coverage on a stock usually reflects an encouraging 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?
However, the average change in broker recommendation is more preferable than a single recommendation change.
Analyst Coverage & Price Movement
Interestingly, the price movement is generally a function of the recommendations from the new analysts. Stocks typically see an upward price movement with a 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 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 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.)
The number of 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:
Prices greater than or equal to 5 (as a stock below $5 will not likely create significant interest for most of the 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 5 of the 11 stocks that passed the screen:
John Bean Technologies Corporation JBT, a leading global solutions provider to the food processing and air transportation industries, has a solid customer base in the U.S. and internationally. Moreover, the stock promises a return of 45.3% on equity and 15.7% on investment capital. The company’s solid return profile and estimated 5-year earnings growth rate of 15% are impressive.
ANI Pharmaceuticals, Inc. ANIP, a specialty pharmaceutical company, has closed three acquisitions and received two FDA approvals so far in 2016. The company anticipates launching a total of seven products in the second quarter of 2016, three of which were launched in April. The stock has a P/E of 16.6, lower than the industry average of 18.7x.
Clearwater Paper Corporation CLW produces pulp and paperboard at six facilities across the country. The stock has moved higher by about 46% so far this year. The company reported impressive first-quarter earnings growth of 181.5% year over year. Its dedicated shareholder friendly moves like repurchasing shares will keep investors’ interest in the stock.
Companhia de Saneamento Basico do Estado de Sao Paulo SBS provides public water and sewage services. The company's principal shareholder is the Sao Paulo government, which owns nearly 50.3% of its shares. The company registered solid growth of 97.6% in its first-quarter net come. Its estimated 5-year earnings growth rate of 29.7% shows promise.
Unisys Corporation UIS, an IT firm, specializes in securing client operations, increasing efficiency of data centers, enhancing support to their end users and constituents and modernizing their enterprise applications.
Unisys is aligning its services and solution portfolio by shifting its offerings to cloud-based and software-as-a-service delivery models. The company is focusing on fewer, more profitable markets and is revamping its sales strategy accordingly.
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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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