Find Strong Stocks Amid Market Pullback with New Analyst Coverage

Stocks tumbled during the first session of the week, with the market closed on Monday in observance of Martin Luther King Jr. Day. The market fell on Tuesday on the back of an underwhelming showing from Goldman Sachs and growing concerns about rising prices and higher rates.

The market-wide selling pushed the S&P 500 1.8% lower, while the Nasdaq dropped 2.6%, and the Dow fell 1.5%. The tech-heavy index is trading below its 200-day moving average for the first time in a while. And traders are now calling for the S&P 500 to finally test the 200-day as well. Meanwhile, the 10-year U.S. Treasury yield hit two-year highs on Tuesday at around 1.88%.

The wave of selling comes amid 40-year high inflation that could spur the Fed to lift interest rates even more quickly than previously projected. In fact, big Wall Street banks are calling for four hikes in 2022, up from three.

Luckily, it will likely take a lot higher rates to start making stocks look broadly unappealing, even if they force further growth-focused selling. Investors should also note the overall S&P 500 earnings and revenue picture remains strong for both 2022 and 2023, even in the face of the current economic headwinds (also read: Banks Provide Mixed Start to Q4 Earnings Season).

The current wave of selling could continue, especially since the market was due for a pullback following its stellar run over the last several years. That said, some of the largest stocks and biggest, most resilient companies are now trading at discounts that might see buyers step in sooner than later.

With this in mind, let’s utilize our new analyst coverage screen to help find potentially winning stocks that have grabbed more attention on Wall Street recently…

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 eight stocks that came through the screen this week…

The Bancorp TBBK - (from 2 analysts four weeks ago to 3)

The Bancorp is one of the few companies in the U.S. that specializes in providing private-label banking and technology solutions for non-bank companies. TBBK works with everyone from upstarts to Fortune 500 firms.

The Bancorp shares have surged 265% in the last three years. The Bancorp is also part of the growing fintech world, and its top and bottom-line outlooks are strong.

OFG Bancorp OFG - (from 2 analysts four weeks ago to 3)

OFG Bancorp is a diversified financial holding company that operates under U.S., Puerto Rico and U.S. Virgin Islands banking laws and regulations. OFG Bancorp’s principal subsidiaries include Oriental Bank, Oriental Financial Services and Oriental Insurance. They provide a wide range of retail and commercial banking, lending and wealth management products, services and technology, mostly in Puerto Rico and the U.S. Virgin Islands.

OFG Bancorp stock is up 50% in the past 12 months to outpace its highly-ranked industry. Despite its run, it still trades at a discount to its current Zacks consensus price target.

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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