We’ve all grown used to using brokers’ consensus earnings estimates to help us quickly assess shares. These forecasts can be useful for a ballpark valuation or as a guide to the near-term outlook – are profits rising or falling?
The problem is that relying on these estimates does not give us an edge. Quite the opposite. All of this information is widely known and is usually already priced into the shares.
To make matters worse, fund managers and other City insiders are likely to have access to more detailed forecasts and analysis than most private investors.
This got me wondering. What if I took the opposite approach and hunted out stocks with no broker coverage?
A lack of coverage is not necessarily a cause for concern. There are legitimate reasons why a company might not have analyst coverage. Common examples are family ownership, small size, or just cost-conscious management.
As a private investor willing to do the research, could I find an edge by focusing on companies of little interest to the City?
A quick screen suggested to me that there are more than 25 UK companies in Stockopedia’s database with a market cap of at least £25m, no broker coverage and a StockRank of at least 50.
I’ve excluded financials (mainly investment trusts) and small-cap miners, as these aren’t likely to have the characteristics I’m looking for.
Here’s a link to the screen I used: Stocks with no coverage
Even more than usual, these screen results are not a list of stocks to buy. Each will require in-depth individual research. But scrolling down the list suggests some interesting possible choices to me.
In the remainder of this article I’ll take a look at three stocks that have caught my eye.
But first, an important health (wealth!) warning.
What could go wrong?
For investors used to trading FTSE 350 shares, there are several potential pitfalls to be wary of in this part of the market.
Liquidity and spreads: many of these shares are lightly traded and very difficult to buy and sell in any quantity. They may also have huge bid-offer spreads – 5% upwards is not uncommon. If you’re not familiar with spreads, there’s a good explanation here.
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