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How to Use New Analyst Coverage to Find Strong Stocks to Buy

One way to find potential winning stocks is to search for companies that recently landed new analyst coverage...

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This story originally appeared on Zacks

October’s momentum has carried over into the early days of November, as the bulls continue to push all three major U.S. indexes to new highs. The S&P 500 has now climbed nearly 8% in the last month, while the Nasdaq is up almost 10% since it began to bounce out of oversold technical levels on October 4. The Dow has also popped around 6% during this stretch.

- Zacks

Wall Street has found reasons to push stocks higher in the face of global economic worries. The major headwinds include rising prices for everything from energy to food and persistent supply chain bottlenecks. These setbacks showed up in slow Q3 GPD growth figures. Still, the market is always looking ahead and Wall Street found enough positives to remain bullish.  

The reasons for optimism include stronger-than-projected quarterly earnings results from a range of sectors, as well as solid guidance in the face of clear economic drawbacks. On top of that, Wall Street is looking to the historically high S&P 500 margins outlook for 2022 and 2023 that highlight resilience.

On top of that, even though the Fed is set to start tapering its bond purchases soon, the central bank doesn’t expect to raise its core interest rate just yet. Plus, even when it does, the market will likely remain in a prolonged state of there is no alternative investing—the 10-year U.S. Treasury has rarely and barely inched above 3% in the last decade.

Investors with long-term outlooks likely want to stay on the hunt for strong stocks even if the market faces some near-term selling pressure after its big October run because the last several months have proven how difficult it can be to time things.

One way to find potential winning stocks is to search for companies that recently landed new analyst coverage…

New Analyst Coverage

Broker recommendations play their part no matter how investors feel about them. And we seemingly all take a look no matter what. Individual investors, large institutional portfolio managers, and everyone in between are likely pleased to see one of their stocks get an upgraded rating or a new analyst cover the company.

Investor interest can generate more analyst coverage. This helps explain why analysts jump on young, much-hyped and talked about tech companies. Then, as new coverage is initiated, the company and the stock become more visible, which in turn often leads to more demand potential and therefore the possibility of higher prices. 

Plus, analysts almost always initiate coverage with a positive recommendation. And the logic follows because why spend all the time and write a research report on a company not widely tracked only to say it’s not good?

When it comes to companies with little to no analyst coverage, 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 search for companies with analyst coverage that has increased over the last 4 weeks. We just look at the number of analyst recommendations today and compare it to the number of analyst recommendations 4 weeks ago.

The rule of thumb here is that an increase in coverage leans bullish and a decrease signals bearish behavior. It is also worth pointing out that, in general, the change in the average broker recommendation is a better indicator than the actual recommendation itself.

On top of that, it is typically more bullish if the increase went from none to one or if the coverage was minimal to begin with. (As the number of analysts climbs the addition of new coverage isn’t earth-shattering.) In the end, increased coverage is still better than decreased coverage, unless the coverage is heading in the wrong direction. 

Now let’s try this screen…

• Number of Broker Ratings now greater than the Number of Broker Ratings four weeks ago

(This shows stocks where new coverage has recently been added.)

• Average Broker Rating less than Average Broker Rating four weeks ago

(By 'less than', we mean 'better than' four weeks ago.)

• Prices greater than or equal to 5

(We’re applying all of the above parameters to stocks above $5 a share since many money managers won't even look at stocks under $5)

• Average Daily Volume greater than or equal to 100,000 shares

(If there's not enough volume, even individual investors won't want it).

Here are 3 of the roughly 15 stocks that came through the screen this week…

Prometheus Biosciences, Inc. RXDX - (from 2 analysts four weeks ago to 3)

Lantronix LTRX - (from 2 analysts four weeks ago to 3)

UGI Corporation UGI - (from 2 analysts four weeks ago to 3)

Many 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. But you can with the Research Wizard. And you can backtest it all. Find out how to pick the right stocks right now by taking a free trial to the Research Wizard stock picking and backtesting program.

Click here to sign up for a free trial to the Research Wizard today.

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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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