5 Stocks In Limelight On New Analyst Coverage

As analysts are the most important information intermediaries in capital markets, initiation of coverage by them creates value for investors, avoiding any misinterpretation of stocks (over- or under-valued).

Coverage initiation on a stock by analyst(s) leads to increased investor enthusiasm. This is because investors tend to believe that the stock holds some value to have attracted analyst attention.

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 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?

It has been noted that stocks typically see an incremental price movement with a new analyst initiating coverage compared to what they witness with a rating upgrade under an existing coverage. Of course, the price movement is a function of recommendations from new analysts. Positive recommendations – Buy and Strong Buy – generally lead to a significant positive price reaction than Hold recommendations. In this regard, analysts hardly initiate coverage with a Strong Sell or Sell recommendation.

However, one should also look for the average change in broker recommendation rather than a single recommendation change.

Now, if an analyst gives 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 13 stocks that passed the screen:

Build-A-Bear Workshop, Inc. (NYSE:BBW) is the only national company providing a make-your-own stuffed animal interactive retail-entertainment experience. The stock has returned more than 7% last month, compared with its Original post

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Written By: Zacks Investment Research