Shrabana Mukherjee
4 min read
In This Article:
The initiation of coverage by new analysts can provide substantial advantages to investors and exert a notable impact on financial markets amid volatility ahead of the 2024 election. Analysts provide essential insights into potential policy changes, market dynamics and economic conditions, enabling investors to make informed decisions amid financial market volatility.
Analysts typically possess specialized knowledge and expertise in particular industries or sectors. Through thorough research and analysis, they offer investors critical insights into a company’s financial health, growth potential, competitive standing, and industry trends — insights that are often difficult for individual investors to acquire independently.
Eagle Bancorp, Inc. EGBN and ImmunityBio, Inc. IBRX 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.
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.
