Stocks jumped to start a holiday-shortened week, with the tech-heavy Nasdaq the big winner on Tuesday, up 1.5%. The positivity came after a somewhat rough week for all three major U.S. indexes. Despite last week’s downturn, the Dow, S&P 500, and the Nasdaq all rest within 1% of their early January records.
Wall Street appeared to cheer the possibility of more government spending on coronavirus relief under the Biden administration. Biden, who will be inaugurated on Wednesday, last week laid out a plan for an additional $1.9 trillion in fiscal stimulus.
On top of that, some of the big banks have posted solid Q4 financial results and the overall earnings outlook for the S&P 500 has improved for the fourth quarter and beyond. The S&P 500 has climbed roughly 13% since the election and investors continue to appear bullish as they bet that the vaccine will help things return to something closer to normal later this year.
With this in mind, investors might want to find stocks that could gain momentum this year. One way to find potential winners is to search for companies that have landed new analyst coverage recently. And the reasoning is pretty straightforward…
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 two of the five stocks that came through the screen this week…
SOC Telemed, Inc. (TLMD) - (from 2 analysts four weeks ago to 4)
Luminar Technologies, Inc. (LAZR) - (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.
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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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