Why do analysts initiate coverage on a particular stock? Of course, stocks are not randomly covered by analysts. New or increased coverage on a stock is usually the result of huge investor focus on it or its promising future forecast by the analyst(s).
Interestingly, stocks typically see an incremental upward price movement with new analyst coverage compared to what they witness with continuation of existing analyst coverage. Of course, the price movement depends on the recommendations from the new analysts. Positive recommendations – Buy and Strong Buy – will lead to a significant positive incremental price reaction than Strong Sell, Sell or Hold recommendations.
Moreover, if an analyst gives a new recommendation on a company that has very few or no analyst coverage, investors start paying more attention toward it. Also, any new information attracts portfolio managers to build a position in the stock.
However, one should preferably look for the average change in broker recommendation rather than a single recommendation change. Then again, an upgrade, an initiation or even increased coverage is equally important.
Keeping this mind, it’s a good strategy to focus on the number of analyst recommendations that have increased 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.)
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 any 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 10 stocks that passed the screen:
Interactive Brokers Group, Inc. (IBKR)
Yirendai Ltd (YRD)
Spark Therapeutics, Inc. (ONCE)
Versartis, Inc. (VSAR)
Accelerate Diagnostics, Inc. (AXDX)
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: http://www.zacks.com/performance.
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INTERACTIVE BRK (IBKR): Free Stock Analysis Report
ACCELERATE DIAG (AXDX): Free Stock Analysis Report
VERSARTIS INC (VSAR): Free Stock Analysis Report
SPARK THERAPEUT (ONCE): Free Stock Analysis Report
YIRENDAI LTD (YRD): Free Stock Analysis Report
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