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5 Stocks to Make the Most of New Analyst Coverage

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·5-min read
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As analysts are crucial information intermediaries in capital markets, initiation of coverage by them creates value for companies.

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

Standard Motor Products, Inc. SMP, GATX Corporation GATX, Nova Ltd. NVMI, AAR Corp. AIR, Arconic Corporation ARNC and are some stocks that have seen new analyst coverage lately and are therefore expected to attract investors' attention.

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 that 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 also consider other relevant parameters to make it 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 out of the 18 stocks that passed the screen:

Standard Motor Products: Based in Long Island City, NY, this company manufactures and distributes replacement parts in the automotive aftermarket industry.

SMP currently carries a Zacks Rank #2 (Buy). The stock has declined 35.7% year to date (YTD) compared with the industry’s 30.7% decline. That said, earnings estimates for fiscal 2022 have increased 3.1% over the past 30 days to $4.68 per share. The estimated figure calls for a 5.2% increase from the year-ago period. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

GATX Corporation: Based in Chicago, IL, GATX operates as railcar leasing company in the United States and internationally.

GATX currently carries a Zacks Rank #2. The stock has lost 7.1% YTD compared with the industry’s 18.4% drop. However, earnings estimates for 2022 have increased 2.3% over the past 30 days to $5.83 per share. The estimated figure calls for a 15.2% increase from the year-ago period.

Nova: Based in Rehovot, Israel, Nova is a provider of metrology solutions for advanced process control used in semiconductor manufacturing in Israel, Taiwan, the United States, China, Korea and internationally.

NVMI currently carries a Zacks Rank #2. The stock has lost 35.5% YTD compared with the industry’s 27.9% drop. Yet, earnings estimates for 2022 have increased 21.8% over the past 30 days to $4.69 per share. The estimated figure calls for a 21.8% increase from the year-ago period.

AAR: Wood Dale, IL-based AAR provides various products and services to the aviation and defense industries worldwide.

AIR currently carries a Zacks Rank #3 (Hold). The stock has lost 10.4% YTD against the industry’s 2.9% drop. Earnings estimates for 2022 calls for a 29.3% increase from the year-ago period.

Arconic: Based in Pittsburgh, PA, manufactures and sells aluminum sheets, plates, extrusions, and architectural products in the United States and internationally.

ARNC currently carries a Zacks Rank #3. The stock has lost 18.2% YTD against the industry’s 6.2% drop. Nonetheless, earnings estimates for 2022 calls for a 183.2% increase from the year-ago period. Earnings estimates for 2022 have increased 0.8% over the past 30 days to $2.53 per share.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

Click here to sign up for a free trial to the Research Wizard today.

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


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