Broker research plays a hugely influential role in how companies are perceived by private and institutional investors but wide variations of coverage mean that some stocks simply slip under the radar. Under-researched shares, particularly at the smaller end of the market, often struggle to make themselves heard in all the noise but that doesn’t necessarily mean they should be avoided. In fact, digging deeper into these neglected firms can not only uncover some interesting opportunities but the very fact they are neglected at all is often an indicator that they could be poised to outperform.
While using low analyst research as a contrarian indicator has only produced a modest 8.5% return from Stockopedia’s Neglected Firms screen so far this year there is plenty of research, notably by US academics Avner Arbel and Paul Strebel, to suggest that low levels of analyst research are connected to high excess returns over the long term. It is believed that this is caused by investors demanding a higher than normal risk premium for investing in these shares because of the lack of available information about them.
In search of quality
To try and get an edge on simply seeking out under-researched value stocks, we dabbled this week with a screen that finds neglected firms that display encouraging signs of both financial strength and high Stockopedia CompositeRanks. To do it, we looked for companies with low coverage but high Piotroski F-Scores of balance sheet health, which is a proxy for being in good financial shape. Meanwhile, the CompositeRank gives us a guide to which of these shares is achieving the highest ratings across a blend of ratios spanning Value, Growth, Quality and Momentum (you can read more about how that works here).
In the UK, the highest ranked stock with low broker coverage is ship broking and consultancy business, Braemar Shipping Services (LON:BMS). Shares in Braemar have risen by around 9% to 415p so far this year despite challenging market conditions hampering its traditional broking business (see chart below). Efforts to diversify into technical services and logistics seems to have brought some stability and the group has said it will expand in these areas in the future. Out of the brokers that cover this stock, only two have issued recommendations (both are ‘buys’), including house broker Westhouse…
