The Power Of New Analyst Coverage

Broker recommendations -– love them or hate them, they do have their place. And we all look at them eventually.

Whether you're a small individual investor or a large institutional portfolio manager (or somewhere in between), who doesn't like it when a stock gets an upgraded rating or sees a new analyst jumping in with coverage? We all do. (Although I should note that, in general, the change in the average broker recommendation is a better indicator than the actual recommendation itself.)

Anyway, today I want to talk about companies that receive new analyst coverage.

One of the things that generates analyst coverage is investor interest. How else can you explain the increased analyst coverage for Facebook (NASDAQ:FB) (a company that's only been public for 2 1/2 yrs.) in comparison to a company like GE (public for more than 40 yrs.)?

And as new coverage is initiated, it becomes more visible, which in turn means potentially more demand (read higher prices).

This is often the case because analysts almost always initiate coverage with a positive recommendation. (Why write a research report on a company not widely followed only to say it stinks?)

And when it comes to companies with little to no analyst coverage, that one new recommendation can sometimes give portfolio managers the validation they need to build a position. (And the more money they can invest, the more they can potentially influence prices.)

The best way to use this information is to look for companies with analyst coverage that has increased over the last 4 weeks.

Simply look at the number of analyst recommendations now in comparison to the number of analyst recommendations 4 weeks ago. An increase in coverage is bullish whereas a decrease in coverage is bearish.

It's typically more bullish if the increase went from none to one or if the coverage was minimal to begin with. (Going from 25 to 26 isn't going to have the same impact because that 26th analyst isn't discovering something 'new'.) But increased coverage is better than decreased coverage –- assuming the coverage is positive of course.

Here's a screen to try:

• Number of Broker Ratings now greater than the Number of Broker Ratings four weeks ago
(This shows stocks where new coverage has recently been added.)

• Average Broker Rating less than Average Broker Rating four weeks ago
(By 'less than', I mean 'better than' four weeks ago.)

• And I'm applying all of the above parameters to stocks with Prices greater than or equal to 5 (most money managers won't even look at a stock under $5) and Average Daily Volume greater than or equal to 100,000 shares (if there's not enough volume, even individual investors won't want it).

Here are 5 stocks from this week's screen:

MOMO MOMO Inc.
(from 3 analysts four weeks ago to 4)

HEI HEICO Corporation
(from 4 analysts four weeks ago to 7)

TAL TAL Education Group
(from 4 analysts four weeks ago to 6)

CHGG Chegg Inc.
(from 5 analysts four weeks ago to 7)

VAR Varian Medical Systems (NYSE:VAR)
(from 6 analysts four weeks ago to 8)

Many screeners won't let you search for the number of analysts covering a stock, let alone comparing the amount of coverage they had weeks or even months ago. But you can with the Research Wizard. And you can backtest it all. Find out how to pick the right stocks right now by taking a free trial to the Research Wizard stock picking and backtesting program.

Sign up for a free trial to the Research Wizard today.

Want more articles from this author? Scroll up to the top of this article and click the FOLLOW AUTHOR button to get an email each time a new article is published.

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.