Broker recommendations -– love them or hate them, they do have their place. And we all look at them eventually.
Whether you’re a small individual investor or a large institutional portfolio manager (or somewhere in between), who doesn’t like it when a stock get an upgraded rating or sees a new analyst jumping in with coverage. We all do. (Although I should note, that in general, the changes in the average broker recommendation is a better indicator than the actual recommendation itself.)
Anyway, what I want to talk about today, are companies that receive new analyst coverage.
One of the things that generates analyst coverage is investor interest. How else can you explain the increased analyst coverage for Google (a company that’s only been public for barely 2½ yrs.) in comparison to a company like GE (public for nearly 40 yrs.).
And as new coverage is initiated, it becomes more visible, which in turn means potentially more demand (read higher prices).
This is often the case because analysts almost always initiate coverage with a positive recommendation. (Why write a research report on a company not widely followed only to say it stinks?)
And when it comes to companies with little to no analyst coverage, that one new recommendation can sometimes give portfolio managers the validation they need to build a position. (And the more money they can invest, the more they can potentially influence prices.)
The best way to use this information is to look for companies whose analyst coverage has increased over the last 4 weeks.
Simply look at the number of analyst recommendations now in comparison to the number of analyst recommendations 4 weeks ago. An increase in coverage is bullish whereas a decrease in coverage is bearish.
It’s typically more bullish if the increase went from none to one or if the coverage was minimal to begin with. (Going from 25 to 26 isn’t going to have the same impact because that 26th analyst isn’t discovering something ‘new’.) But increased coverage is better than decreased coverage –- assuming the coverage is positive of course.
Here’s a screen to try:
- Number of Broker Ratings four weeks ago <= 5
(No more than 5 analysts were covering the stock four weeks ago.)
- Number of Broker Ratings now >= 6
(There are at least 6 analysts covering the stock now.)
- Average Broker Rating < Average Broker Rating four weeks ago
(By ‘ < ’ (less than), I mean ‘better than’ four weeks ago.)
- Average Broker Rating <=3
(I’m not that concerned about the rating itself. But since analysts recommendations do tend to be skewed more to the bullish side, I’d prefer to not have them be ‘bearish’.)
And for good measure ...
- % Change in Q(1) Estimates >= 0 and ...
- % Change in F(1) Estimates >= 0
(Companies that receive upward estimate revisions have a tendency of receiving even more upward estimate revisions. This, in combination with the stock’s increased visibility due to ‘new’ coverage, can be quite powerful.)
- And I’m applying all of the above parameters to stocks with Prices >= 5 (most money managers won’t even look at a stock under $5) and Average Daily Volume >= 50,000shares (if there’s not enough volume, even individual investors won’t want it).
There are 14 stocks that made it thru this week’s screen (6/18/07). Here’s three of them:
GHDX Genomic Health, Inc.
PCZ Petro-Canada
SPN Superior Energy Services, Inc.
Many screeners won’t let you search for the number of analysts covering a stock, let alone comparing the amount of coverage they had weeks or even months ago. The same goes for changes in the Average Broker Rating and Estimate Revisions. But you can with the Research Wizard. And you can backtest it all. Find out how to pick the right stocks right now by taking a free trial to the Research Wizard stock picking and backtesting program. http://researchwiz.zacks.com
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.