New Analyst Coverage

May 21, 2008 2:41 PM

Broker recommendations—love them or hate them—do have their place. And we all look at them eventually.

I want to talk today about 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 not even been public for four full years) in comparison to a company like GE (public for approx. 40 years)?

And, as new coverage is initiated, it becomes more visible. This, in turn, means potentially more demand (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 four weeks.

Simply look at the number of analyst recommendations now in comparison to the number of analyst recommendations four 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 five analysts were covering the stock four weeks ago.)

Number of broker ratings now >= 6

(There are at least six 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 tend to be “bullishly” biased, I’d prefer to not have them be “bearish.”)

And for good measure:

% Change in Q(1) Estimates >= 0
% Change in F(1) Estimates >= 0

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).

Here’s three stocks from this week’s list (5/20/08);

CXG CNX Gas Corp.
FWLT Foster Wheeler, Ltd.
ITRN Ituran Location and Control, Ltd.

Get the rest of the stocks on this list, and see what new stocks the analysts are talking about. And don’t stop there. Try finding companies with no coverage four weeks ago that are finally being looked at today.

Most 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 back-test it all. Find out how to pick the right stocks right now by learning more about our free trial to the Research Wizard stock picking and back-testing 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.