5 Stocks To Bet On New Analyst Coverage

As analysts are one of the most important information intermediaries in capital markets, initiation of coverage by them creates value for companies.

It is to be borne in mind that that the lack of consistency in information creates inefficiencies that might result in the interpretation of stocks (over- or under-valued). Thus, initiation of coverage by analysts offers critical information on a stock which is of great value to investors.

Coverage initiation on a stock by analyst(s) usually depicts increased investor inclination. Investors, on their part, often assume that there is something in the stock that has attracted analyst attention. In other words, they believe that the company coming under the radar definitely has some value which can be tapped into.

Obviously, stocks are not arbitrarily chosen to cover. New coverage on a stock usually reflects an encouraging future envisioned by the analyst(s). At times, increased investor focus on a stock motivates analysts to take a closer look at it.

However, we have noticed that the average change in broker recommendation is preferred over a single recommendation change.

Analyst Coverage & Price Movement

Interestingly, the price movement is generally a function of the recommendations from 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 issues 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.

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).

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 five of the nine stocks that passed the screen:

AppFolio, Inc. (APPF – Free Report) offers cloud-based software solutions for property management and legal industries. The stock has climbed 72.3% year to date, while the industry gained 16%. This Zacks Rank #1 (Strong Buy) stock has seen earnings estimates move up 113.3% for this year and 50% for the next over the past 30 days. Positive earnings estimate revisions for 2017 and 2018 along with an expected earnings growth rate of 366.7% for 2017 and 39.6% for the next indicate the stock’s potential for price appreciation. The company has a solid average positive earnings surprise of 241.7% for the trailing four quarters.

Columbus McKinnon Corporation (CMCO – Free Report) , a broad-line designer, manufacturer and supplier of sophisticated material handling products and integrated material handling solutions, returned 14.1% year to date, as against its industry’s 2.6% decline. The company surpassed the Zacks Consensus Estimate in two of the past four quarters at an average of 10.70%. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Concert Pharmaceuticals, Inc. (CNCE – Free Report) is a biopharmaceutical company. This Zacks Rank #3 (Hold) stock has seen earnings estimates move up for this year and the next over the past 30 days. The stock has climbed 38.6%, comparing favorably with the industry’s 3.5% decline so far this year.

Aceto Corporation (ACET – Free Report) is a small cap distributer of chemical compounds. The stock holds a Zacks Rank #3 and a VGM Score of B. The company has a solid earnings growth rate of 32.9% for the current quarter and 57.1% for the next.

Liberty Media Corporation (FWONA – Free Report) is engaged in media, communications and entertainment businesses. The stock has outperformed the industry, gaining 4.9% so far this year. The company has a solid average positive earnings surprise of 37.41% for the trailing four quarters.