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4 Stocks In Focus On New Analyst Coverage

Published 06/08/2016, 09:34 PM
Updated 07/09/2023, 06:31 AM

Analysts play a crucial role in investment decisions as they hold vital information. A lack of information creates inefficiencies that might result in stocks being misrepresented (over- or under-valued).

Here two questions inevitably crop up. Do analysts create value for companies by initiating coverage? And, why do analysts initiate coverage?

Coverage initiation of a stock by analyst(s) usually depicts increased investor keenness. 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.

Again, stocks are not randomly picked to cover. A new coverage on a stock is usually the result of a promising 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?

One should also look for the average change in broker recommendation rather than a single recommendation change.

Analyst Coverage & Stock Price Movement

Interestingly, 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. The price movement is a function of the recommendations from the new analysts. Positive recommendations – Buy and Strong Buy – generally lead to a significantly positive price reaction than Hold recommendations. In this regard, 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 4 stocks that passed the screen:

Theravance Biopharma, Inc. (NASDAQ:TBPH) is a biopharmaceutical company focused on the discovery, development and commercialization of small molecule medicines across a number of therapeutic areas. With a number of data readouts lined up for the next few quarters, we expect investor focus to remain on pipeline updates from the company.

Krispy Kreme Doughnuts, Inc. (NYSE:KKD) , together with its subsidiaries, operates as a branded retailer and wholesaler of doughnuts, coffee and other complementary beverages, and treats and packaged sweets.

The company’s first-quarter fiscal 2017 earnings were on par with the Street expectation and increased 4.2% year over year. Its revenues were also up 3% while system-wide store count rose 13.0% to 1,133 shops worldwide.

Silicon Graphics International Corp. (NASDAQ:SGI) is a global leader in large-scale clustered computing, clustered storage, HPC and data center enablement and services. It reported better-than-expected fiscal third-quarter 2016 earnings. Although delays in the federal business are significantly impacting its outlook for the year, the company’s growing High Performance Data Analytics or HPDA in-memory pipeline and new OEM deal are expected to help diversify and enhance its revenue and profitability.

Monotype Imaging Holdings Inc. (NASDAQ:TYPE) provides text imaging solutions for manufacturers and developers of consumer electronics devices globally. The company delivered a solid first quarter, driven by a strong performance from its Creative Professional business. Its quarterly revenues increased 8% year over year.

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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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SILICON GRAPHIC (SGI): Free Stock Analysis Report

THERAVANCE BIO (TBPH): Free Stock Analysis Report

KRISPY KREME (KKD): Free Stock Analysis Report

MONOTYPE IMAGNG (TYPE): Free Stock Analysis Report

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