Lack of information creates inefficiencies that might result in misinterpretation of stocks (over- or under-valued). Thus, initiation of coverage by analysts offers critical information on a stock which is of great value to investors.
Coverage initiation of a stock by analyst(s) usually depicts greater investor inclination. Investors, on their part, often assume 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 has some worth.
Obviously, stocks are not arbitrarily chosen to cover. A new coverage on a stock usually reflects an encouraging future envisioned by the analyst(s). At times, increased investors’ focus on a stock motivates analysts to take a closer look at it. After all, who doesn’t love to produce something that is already in demand?
Needless to say, considering the average change in broker recommendation is preferable over a single recommendation change.
Analyst Coverage & Price Movement
The price movement of a stock is generally a function of the recommendations on it from new analysts. Stocks typically see an upward price movement with a 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 than Hold recommendations. On the contrary, analysts hardly initiate coverage with a Strong Sell or Sell recommendation.
Now, if an analyst gives a new recommendation on a company that has few or no existing coverage, investors start paying more attention to it. Also, any new information attracts portfolio managers to build a position in the stock.
So, it’s a good...