Analysts initiate coverage for new companies all the time so the question is, can we learn from this? I came across a study that examined and concluded the following:
… adding coverage event itself signals more favourable information about future earnings performance of newly added stocks with nonnegative ratings of “Buy” or “Hold”, and on one-month post-recommendation excess stock return of new added stocks with non-negative ratings of “Strong Buy”, “Buy” or “Hold”. Moreover, the dropping coverage event itself signals some unfavourable information on future earnings performance that has not been reflected in final ratings of “Strong Buy”, “Buy”, “Hold”, or “Sell” on subsequently dropped stocks.
University of Windsor – Odette School of Business
November 27, 2003
While I will be the first to admit that I did not completely read nor understand the entire paper, I am interpreting Jerry’s conclusions. Based on his study, there is a good chance that if I buy a stock where analyst initiated coverage, the stock may perform well and if a stock loses coverage, then it may not perform well. If the stock loses coverage, it may be the analyst saying that this stock is not going to do well anymore rather then recommending a Sell. Of course, further analysis of these stocks are required but this helps with the decision making.
Using my own data that I’ve been gathering, I investigated what types of opinions usually accompanied new coverage initiations and not surprisingly I found that the overwhelming majority had postive opinions. I think this tells us a couple things:
1) Use these initiations to your advantage, there may be more good news to come. However, given that so many are positive, Iwould think that there are probably a lot of companies that will not do well. I’m going to review the one month to 6 month performance of these stocks once I have enough data for that so that I can be more conclusive about this.
2) Analysts mainly initiate coverage because they have something good to say,or perhaps they have incentive to say something good. However, it seems to me that stocks probably start out with good coverage.
Highlighted in Red is the negative rating, and in yellow ratings that are more neutral, not positive or negative.
Initiations and the opinions over a 1 month period
Shows the percentages in chart form