3 Stocks for Better Returns as New Analysts Initiate Coverage

Feb 9, 2024

The initiation of coverage by new analysts can offer significant benefits to investors and wield a considerable influence on financial markets. Analysts often boast specialized knowledge and proficiency in specific industries or sectors. By conducting meticulous research and analysis, they provide investors with invaluable insights into a company’s financial health, growth prospects, competitive position, and industry trends. These insights are often difficult for individual investors to obtain on their own.

Dream Finders Homes, Inc. (DFH Free Report) , Vista Energy, S.A.B. de C.V. (VIST Free Report) and Inspired Entertainment, Inc. (INSE Free Report) are three stocks that have recently come under the analytical spotlight, signaling potential opportunities for judicious investors.

Analysts don’t randomly choose which stocks to cover. Their decision is typically driven by significant investor interest or promising prospects associated with a particular stock.

An interesting observation is that when stocks receive new analyst coverage, they often experience gradual upward price movements compared to those already covered by analysts. The magnitude of this price movement is influenced by the recommendations made by the new analysts. Positive recommendations like “Buy” and “Strong Buy” tend to result in more substantial positive price reactions than “Strong Sell,” “Sell,” or “Hold” recommendations.

When an analyst provides a new recommendation for a company with limited or no prior analyst coverage, investors pay increased attention to the stock. Additionally, portfolio managers may become interested in building positions in such stocks due to the fresh information.

Rather than focusing solely on a single recommendation change, it is advisable to consider the average change in broker recommendations. Upgrades, initiations, and increased coverage by multiple analysts carry equal significance in assessing a stock’s potential.

To create a prudent investment strategy, it’s worthwhile to concentrate on the number of analyst recommendations that have increased in recent weeks. This approach can offer valuable insights into the overall sentiment and potential trajectory of a stock, helping investors make well-informed decisions.

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 three out of the seven stocks that passed the screen:

Dream Finders Homes: This Jacksonville, FL-based homebuilder’s shares have gained 155.2% over the past year, outperforming the industry’s 57.8% rise.

DFH — a Zacks Rank #1 (Strong Buy) company — has an expected revenue growth rate of 12.2% year over year for 2024. DFH’s earnings per share (EPS) estimates for 2024 have increased to $2.81 from $2.62 over the past 60 days. Earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters and missed on one occasion, the average being 131.6%.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Vista Energy: Headquartered in Mexico City, this firm specializes in the exploration and extraction of oil and natural gas across Latin America. Shares of VIST have gained 90.5% over the past year against the industry’s 7.2% decline.

VIST presently has a Zacks Rank #3 (Hold). The company’s earnings per share surpassed the Zacks Consensus Estimate in two of the trailing four quarters and missed in the other two, the average being 5.1%. Again, it has an impressive VGM Score of A. This helps to identify stocks with the most attractive value, growth and momentum.

Inspired Entertainment: Based in New York, this gaming technology firm provides content, platforms, and various other products and services to regulated lottery, betting and gaming operators globally. Shares of INSE have lost 41.6% over the past year, against the industry’s 33.9% rise.

INSE currently carries a Zacks Rank #3. Although shares have underperformed the industry, the solid EPS growth rate depicts its prospects. The EPS estimates for 2024 indicate 33.3% year-over-year growth. Again, it has an impressive VGM Score of A.

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.

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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

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