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Use New Analyst Coverage to Find Great Momentum Stocks to Buy in May
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The large-cap tech stock resurgence has driven stock indexes higher in 2023. The big post-earnings release surges from Microsoft and Meta serve as useful examples of how a few big moves from massive stocks can hide potential weaknesses below the surface.
The S&P 500 has climbed around 9% YTD, but huge double-digit gains from roughly a dozen tech stocks have accounted for a majority of the move. Meta and Nvidia both boast over $600 billion market caps and are up roughly 100% this year. At the moment, about 290 S&P 500 companies are in the green, with about 150 of those outperforming the benchmark.
The unknowns of inflation, earnings, economic growth, and the Fed make things even a bit trickier. This backdrop might have investors looking to focus more than ever on buying stocks (big or small) that are, in fact, outpacing in 2023.
One way for investors to find potentially market-beating stocks to buy in May is to search for stocks gaining analyst coverage. The idea is pretty simple: analysts are more inclined to start covering a stock that they see substantial upside potential in vs. picking up coverage only to say stay away. And the current market uncertainty likely makes analysts even more discerning.
Here is how to use our new analyst coverage screen to help investors find stocks to buy in May and for the back half of 2023.
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 is one of the six stocks that came through the screen today…
Harrow Health, Inc. ((HROW - Free Report) ) - (from 2 analysts four weeks ago to 3)
Harrow Health is an eyecare pharmaceutical firm. HROW is focused on the discovery, development, and commercialization of advanced ophthalmic therapies that are both “accessible and affordable.” Harrow owns U.S. commercial rights to 10 FDA-approved ophthalmic pharmaceuticals. The company also owns and operates ImprimisRx, which is a leading U.S. ophthalmic-focused pharmaceutical compounding business.
Harrow is gaining steam as its pharmaceutical offerings are increasingly used to drive better outcomes in cataract surgery and other eye care. Ophthalmologists in the U.S. are set to become increasingly busy as the population grows older. Harrow posted 48% sales growth in 2021 and 22% in 2022, helping it swing from a loss of -$0.16 a share to +$0.05 last year.
Image Source: Zacks Investment Research
Zacks estimates call for HROW’s revenue to surge another 56% in 2023 and 32% higher in 2024. Better yet, its adjusted earnings are projected to skyrocket 520% to $0.31 per share in FY23 and then another 390% in FY24 to reach $1.51 a share. Harrow blew away our Q4 EPS estimates and its upward revisions for this year and next help it land a Zacks Rank #1 (Strong Buy) right now.
Harrow shares have managed to climb 280% in the last year and over 1,000% in the past five years. This huge run includes a 75% jump in 2023 that has it comfortably above both its 50-day and 200-day moving averages. Plus, alongside its cheap $26 a share price tag, HROW is trading at 36.6X forward earnings vs. its recent highs of 98X.
Harrow is set to release its Q1 FY23 financial results on May 11.
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.
Want more articles from this author? Scroll up to the top of this article and click the FOLLOW AUTHOR button to get an email each time a new article is published.
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.
Image: Bigstock
Use New Analyst Coverage to Find Great Momentum Stocks to Buy in May
The large-cap tech stock resurgence has driven stock indexes higher in 2023. The big post-earnings release surges from Microsoft and Meta serve as useful examples of how a few big moves from massive stocks can hide potential weaknesses below the surface.
The S&P 500 has climbed around 9% YTD, but huge double-digit gains from roughly a dozen tech stocks have accounted for a majority of the move. Meta and Nvidia both boast over $600 billion market caps and are up roughly 100% this year. At the moment, about 290 S&P 500 companies are in the green, with about 150 of those outperforming the benchmark.
The unknowns of inflation, earnings, economic growth, and the Fed make things even a bit trickier. This backdrop might have investors looking to focus more than ever on buying stocks (big or small) that are, in fact, outpacing in 2023.
One way for investors to find potentially market-beating stocks to buy in May is to search for stocks gaining analyst coverage. The idea is pretty simple: analysts are more inclined to start covering a stock that they see substantial upside potential in vs. picking up coverage only to say stay away. And the current market uncertainty likely makes analysts even more discerning.
Here is how to use our new analyst coverage screen to help investors find stocks to buy in May and for the back half of 2023.
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 is one of the six stocks that came through the screen today…
Harrow Health, Inc. ((HROW - Free Report) ) - (from 2 analysts four weeks ago to 3)
Harrow Health is an eyecare pharmaceutical firm. HROW is focused on the discovery, development, and commercialization of advanced ophthalmic therapies that are both “accessible and affordable.” Harrow owns U.S. commercial rights to 10 FDA-approved ophthalmic pharmaceuticals. The company also owns and operates ImprimisRx, which is a leading U.S. ophthalmic-focused pharmaceutical compounding business.
Harrow is gaining steam as its pharmaceutical offerings are increasingly used to drive better outcomes in cataract surgery and other eye care. Ophthalmologists in the U.S. are set to become increasingly busy as the population grows older. Harrow posted 48% sales growth in 2021 and 22% in 2022, helping it swing from a loss of -$0.16 a share to +$0.05 last year.
Image Source: Zacks Investment Research
Zacks estimates call for HROW’s revenue to surge another 56% in 2023 and 32% higher in 2024. Better yet, its adjusted earnings are projected to skyrocket 520% to $0.31 per share in FY23 and then another 390% in FY24 to reach $1.51 a share. Harrow blew away our Q4 EPS estimates and its upward revisions for this year and next help it land a Zacks Rank #1 (Strong Buy) right now.
Harrow shares have managed to climb 280% in the last year and over 1,000% in the past five years. This huge run includes a 75% jump in 2023 that has it comfortably above both its 50-day and 200-day moving averages. Plus, alongside its cheap $26 a share price tag, HROW is trading at 36.6X forward earnings vs. its recent highs of 98X.
Harrow is set to release its Q1 FY23 financial results on May 11.
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.
Want more articles from this author? Scroll up to the top of this article and click the FOLLOW AUTHOR button to get an email each time a new article is published.
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.