The initiation of coverage by new analysts can provide substantial advantages to investors and exert a notable impact on financial markets. 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.
Grupo Supervielle S.A. (SUPV – Free Report) , Emergent BioSolutions Inc. (EBS – Free Report) and Innodata Inc. (INOD – Free Report) are three 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 is 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 five stocks that passed the screen:
Grupo Supervielle S.A.: This is a Buenos Aires, Argentina-based financial services holding company. SUPV currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
SUPV shares have gained 31.3% over the past three months against the industry’s 10.3% decline. Earnings per share (EPS) estimates for SPUV have moved north to $1.29 from $1.20 for 2024 in the past 60 days, depicting analysts’ optimism over the company’s prospects. The estimated figure indicates 59.3% growth from a year ago.
Emergent BioSolutions: Headquartered in Gaithersburg, MD, this is a life sciences company. EBS currently has a Zacks Rank #2 (Buy).
Emergent BioSolutions’ shares have lost 22.6% over the past three months, underperforming the industry’s 1% rise. Yet, the bottom-line estimates for EBS have improved to a loss of $1.30 per share from a loss of $1.98 per share for 2024 in the past 30 days. It also has a favorable VGM Score of B.
Innodata: Based in Ridgefield Park, NJ, this company operates as a global data engineering company. INOD currently has a Zacks Rank #3 (Hold).
INOD shares have lost 17.9% over the past three months compared with the industry’s 9.6% rise. Nonetheless, EPS estimates for 2024 have moved north to 21 cents from 18 cents in the past 60 days. Innodata also has a favorable VGM Score of B.
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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.
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