Coverage Initiated

What Is Coverage Initiated?

Coverage initiated is a phrase used in financial media to announce that a brokerage or analyst issues their first rating on a particular stock. These ratings initially were "buy," "sell," and "hold;" however, as time has progressed they have expanded to include others such as "strong sell," "strong buy," "underperform," and "outperform," among others.

The initiation of analyst coverage on a stock is significant to traders and fund managers because it indicates increased attention, and resulting trading volume will likely follow because an analyst is continually publishing on the subject going forward.

Understanding Coverage Initiated

Coverage initiated often takes place either after a highly visible company has recently gone public or after the stock has been available for a while and has had sufficient success for institutional investors to care about the details of that company and its business. Prior to the initiation of analyst coverage, the company has not likely received any official analyst ratings although usually a lot of press has surrounded the company in its later growth phases and rounds of venture capital or private equity investments.

When coverage is initiated, the media usually provides notice to investors ahead of the event, including speculation about what the rating(s) could be. Many sell-side investment analysts concurrently publish an "initiating coverage" report, followed by periodic updates. Certain media sites like The Wall Street Journal’s Marketwatch and Bloomberg will aggregate these initial ratings into an average “analyst estimate.”

Coverage Initiated and the Role of the Analyst

Many analysts working for sell-side firms work arduous hours. During the first few years of an analyst's career, they can expect to focus on gathering relevant data, updating comparison spreadsheets and financial models, and reading relevant news and industry publications—all building a solid fundamental understanding of a particular business, sector, or industry.

Some firms will require that analysts pass one more level of the CFA exam in order to advance, along with their Series 7 and Series 63 licenses.

Coverage Initiated and Price Target

In general, an analyst will arrive at a specific price target in her report. An analyst derives this number using certain key drivers like sales. In a discounted cash flow (DCF) model, the analyst will start by projecting a company’s future free cash flows. From there they will discount them, using a required annual rate, to arrive at a present value estimate.

In turn, this present value estimate becomes the price target. If the value that the analyst arrives at through DCF analysis is higher than the company’s current share price, they will mark the security as underpriced and potentially issue a "buy" rating; if the present value estimate is lower than the market price, they could initiate coverage with a "sell" and mark the security as overpriced.