Home > Uncategorized > Initiating Coverage – Can we take advantage of it?

Initiating Coverage – Can we take advantage of it?

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.
 
Jerry Sun
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.

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Categories: Uncategorized
  1. February 21, 2010 at 4:39 am

    Very interesting… I haven’t put much thought into that before. Thanks!

  2. Mr. R
    February 21, 2010 at 3:52 pm

    Interesting point of view. More concerning is they may just make the recommandation because they already holding those stock and want it to go up in next few months. Anaylst should tell public investor what is their average cost and position before they recommand or start cover a stock.

    • February 21, 2010 at 4:57 pm

      They are supposed to disclose any conflicts of interests, like whether they own the stock or not. It makes sense that they analyst would initiate coverage on a company that they have some kind of incentive or motivation for either directly or indirectly. Thanks for your feedback!

      • May 20, 2011 at 7:11 am

        Tnakhs for sharing. Always good to find a real expert.

  3. May 27, 2012 at 4:26 am

    fine, here you go, but read it and understand why it’s in the order it is.-Amanda Smith of Hartford, CT, dedeiss to buy Great Computer Company stock. She calls a local stockbroker who works for a firm that is a member of the NYSE.-Amanda asks her stockbroker the current price for Great Computer Company stock. The broker checks the quote (the highest bid to buy, the lowest offer to sell) for Great Computer Company stock using an electronic market data system.-The stockbroker gives Amanda the current market price of Great Computer Company and she instructs the stockbroker to buy 100 shares.-The broker sends the order to the Trading Floor of the NYSE electronically via the SuperDOT System to the specialist’s workstation or through Broker Booth Support System (BBSS) to the broker’s handheld computer.-At the trading post, the specialist that handles Great Computer Company Stock makes sure the transaction is executed in a fair and orderly manner. Amanda’s order competes with other orders in the Great Computer Company at the point of sale for the best price.-After the transaction is executed, the specialist’s workstation sends notice to Amanda’s firm (the buyer) and to the seller’s firm, as well as to the consolidated tape so that a written record is made.-The tranaction is reported by computer and appears within seconds on the consolidated tape displays across the county and around the world.-The transaction is processed electronically. Amanda recieves a trade confirmation from her broker’s firm describing the trade, and the exact amount she owes for the 100 shares of Great Computer Company plus any applicable commissions.

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