The significance of recent analyst coverage becomes apparent through the wealth of data it reveals for investors. Analysts have access to essential information that plays a pivotal role in making informed investment decisions.
ICU Medical, Inc. (ICUI – Free Report) and Ardmore Shipping Corporation (ASC – Free Report) are two stocks that have witnessed new analyst coverage lately. These are, therefore, expected to attract investor attention.
Coverage initiation on a stock by analyst(s) usually portrays higher investor inclination. Investors, on their part, often assume that there is something special in a stock to attract analysts to cover it. In other words, they believe that the company coming under the microscope definitely holds some value.
Do analysts create value for companies by initiating coverage? Of course, they do because they play an important intermediary role with their extensive access to relevant data. Many investors have immense faith in analysts’ research as they fear that a lack of information might trigger inefficiencies.
Obviously, stocks are not randomly chosen to cover. A new coverage on a stock usually reflects a reassuring future envisioned by the analyst(s). At times, increased investor focus on a stock motivates analysts to take a closer look at it. After all, who doesn’t like to produce something that is already in demand? Hence, we often find that analysts’ ratings on newly added stocks are more favorable than their ratings on continuously covered stocks.
Needless to say, the average change in broker recommendation is preferable to a single recommendation change.
Impact on Stock Price
The price movement of a stock is generally a function of the recommendations from new analysts. Stocks typically see an upward price movement with 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 compared with 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 very little or no existing coverage, investors start paying more attention to it. Also, any further 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
The 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 the volume isn’t enough, it will not attract individual investors).
Here are two out of the three stocks that passed the screen:
ICU Medical: This San Clemente, CA-based medical devices manufacturer’s shares have lost 23.7% over the past six months against the industry’s 8.9% rise. ICUI currently carries a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Although shares have underperformed the industry over the said time frame, ICUI’s earnings per share (EPS) estimates have moved north to $4.55 from $4.43 over the past 30 days. This depicts analysts’ optimism over the company’s prospects. Earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 18.9%. Also, it has a VGM Score of B. This score helps to identify stocks with the most attractive value, growth and momentum.
Ardmore Shipping: Based in Pembroke, Bermuda, this company engages in the seaborne transportation of petroleum products and chemicals worldwide. ASC shares have gained 27.3% over the past six months, outperforming the industry’s 19% rise.
ASC’s EPS estimates have moved north to $2.60 from $2.11 per over the past 30 days. Earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 5.6%. ASC currently carries a Zacks Rank #3 and has a VGM Score of A.
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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
