The S&P 500 dropped 1.7% on Monday, for its worst showing since May. The fall followed worries about growing troubles in China’s property market as Beijing is increasingly focused on reining in various industries.
Monday’s downturn is part of a broader September pullback and it seems due given that analysts and traders have been calling for major U.S. indexes to post a significant drop or even correction for a while now. The calls increased after the last small July selloff was erased rather quickly.
The selling sent the S&P 500 and the Nasdaq under their 50-day moving averages, but buyers started to step in Monday afternoon and all three major U.S. indexes attempted to close regular hours in the green Tuesday before the Dow and the S&P slipped in late-afternoon trading. Even with the recent fall, the S&P 500 and the Nasdaq are only down around 4% from their records.
The market could remain somewhat shaky as we close out the final few months of 2021, given the historic run off the coronavirus lows, coupled with the fact some Wall Street analysts think the U.S. economic comeback already peaked. That doesn’t mean investors with long-term horizons should move to the sidelines. Instead, some might want to buy good stocks at solid discounts when they can.
The overall earnings picture remains strong, even though some of the positive revisions have slowed, and the margins outlook for 2022 and 2023 suggests inflation could indeed be transitory. On top of that, interest rates will continue to favor stocks even when the Fed starts to raise them. Given this backdrop, investors might want to consider adding stocks amid the September pullback.
One way to find potential winners is to search for companies that have 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 two of the nearly 15 stocks that came through the screen this week…
Vivint Smart Home, Inc. VVNT – (from 2 analysts four weeks ago to 3)
Carpenter Technology Corporation CRS – (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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