5 Stocks To Make The Most Of New Analyst Coverage

Coverage initiation by analyst(s) on a stock inevitably leads to increased investor interest. 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.

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 11 stocks that passed the screen:

Logitech International S.A. (LOGI - Free Report), a global leader in peripherals for personal computers and other digital platforms, has gained 45.9% year to date, outperforming its industry’s 0.7% growth. This Zacks Rank #1 (Strong Buy) stock’s earnings estimates have moved 5.6% north for the current year and 3.8% for the next over the past 30 days. The company’s bottom line is expected to witness around 17% year-over-year growth in the current year and 16.8% in the next.

Koppers Holdings Inc. (KOP - Free Report) provides treated wood products, wood treatment chemicals, and carbon compounds in the United States and internationally. While Koppers has underperformed the industry so far this year, this Zacks Rank #2 (Buy) company’s earnings estimates have increased 7% to $4.10 for 2018 and 2.6% to $4.48 for 2019 over the past 30 days. Earnings for the company are expected to rise 11.4% in the current year and 9.4% in 2019.

Exantas Capital Corp. (XAN - Free Report), a real estate investment trust, has gained 27.6% year to date, while its industry saw a 0.1% decline. This Zacks Rank #2 company’s earnings estimates for the current year and the next have moved up 29.7% and 31%, respectively, over the last 30 days. Earnings for the company are expected to grow 162.3% in 2018 and 58.3% in 2019.

Magnolia Oil & Gas Corporation (MGY - Free Report), an oil producer, has seen its shares climb 43% this year, while its industry has lost 0.7%. The stock carries a Zacks Rank #3 (Hold) and its estimates have moved 70.4% north for 2018 and 58.4% for 2019 over the past 30 days.

Ternium S.A. (TX - Free Report) is the leading producer of flat and long steel products of Latin America. While Ternium has underperformed the industry so far this year, this Zacks Rank #3 company’s earnings estimates have increased 9.7% for 2018 and 5.4% for 2019 over the past 30 days, reflecting analysts’ optimism on the stock’s earnings potential. The company’s earnings are expected to see around 47.9% year-over-year growth in 2018.