Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.
When building a winning stock portfolio, one often looks for characteristics that provide an edge. One such characteristic, inspired by Peter Lynch’s seminal work One Up on Wall Street, is identifying companies with minimal analyst coverage. Lynch highlighted that when institutions don’t own a stock and analysts don’t follow it, the company is often "under the radar." [1]. Here’s why this matters and how you can leverage it in your investment strategy.
The Rationale Behind Low Analyst Coverage
Minimal Analyst Coverage as a Favorable Trait One of the signs of an overlooked gem is when there are fewer than 10 analysts covering a company. For reference, popular stocks like:
Tesla: 52 analysts
Nvidia: 62 analysts are extensively covered by the market.
By contrast, companies like:
Semrush: Only 6 analysts
Badger Meter Inc (BMI): Only 8 analysts
have significantly less attention, signaling potential for discovery by early investors.
Why Is Low Coverage Exciting?
Unrecognized Value: With fewer eyes on the stock, mispricings are more likely. You might find a high-growth company that’s yet to be fully valued by the market.
Institutional Entry Point: Institutions and funds often prefer to companies with substantial analyst coverage. Low coverage indicates that a company has not yet caught the attention of big money, giving individual investors a first-mover advantage.
Opportunity to Invest Early: Investing before the broader market catches on can lead to significant returns as the stock gains visibility.
How to Find the Number of Analysts Covering a Stock
Finding the number of analysts covering a stock is a straightforward process. Here are the steps:
Use a Reliable Financial Data Platforms such as Reuters,
search for the company, under Profile, you can see the number of analysts covering the stock.
Note however, Minimal analyst coverage is a bonus trait, and not sole factor for promising returns.
While low analyst coverage (<10) is a promising trait, it should not be used in isolation. Always ensure the fundamentals of the company are solid first. Consider factors such as:
Competitive advantages in the industry
Quality of management and business execution.
Once the fundamentals check out, this criterion serves as a "bonus" trait, adding an extra layer of confidence to your investment decision.
By adopting this approach, you’re not just following the crowd but taking a proactive step toward achieving your financial goals through strategic stock selection.
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