Coverage initiation by an analyst(s) on a stock inevitably leads to increased investor enthusiasm. This is because investors assume that there is something in the stock that has attracted analyst attention. In other words, they assume that the company coming under the microscope definitely has some value.
Why do analysts initiate coverage? Of course, 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?
Importantly, the average change in broker recommendation is always preferred over a single recommendation change.
Analyst Coverage & Price Movement
Interestingly, price movement is generally a function of the recommendations from new analysts. Stocks typically see an upward price movement on 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 take notice of the stock. 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.
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