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Stock Strategist

10 Cheap Stocks Your Broker Might Not Mention

Our analysts like these firms, but Wall Street barely covers them.

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Despite recent changes to their business models, large Wall Street brokerage houses still have incentives to cover large-cap companies. These incentives include trading commissions and spreads earned from filling customer orders. The larger a company's cap, the more widely its shares are usually held, the more liquid the market for the firm's shares, and the more trading business there is to go around. Moreover, the more volatile the shares are, the more often they are traded, which creates more opportunity for Wall Street firms to collect fees.

As a result of these incentives, it seems, Wall Street analysts seldom cover smaller firms, and the brokers who use their in-house research might not mention them to clients as often, if at all. In turn, individual investors might be less aware of these smaller companies and less likely to invest in them. Indeed, measuring how many Wall Street analysts provide earnings estimates for the 7,000 companies in our database and sorting these by the market capitalization of each firm reveals that Wall Street analysts concentrate their efforts on companies with a market capitalization well above $1 billion.

Nicolas Owens has a position in the following securities mentioned above: CMP. Find out about Morningstar’s editorial policies.