Lack of information creates inefficiencies that might result in misinterpretation of stocks (over- or under-valued). Thus, initiation of coverage by analysts offers critical information on a stock which is of great value to investors.

Coverage initiation of a stock by analyst(s) usually depicts greater investor inclination. Investors, on their part, often assume there is something special in a stock to attract analysts to cover it. In other words, they believe that the company coming under the microscope definitely has some value.

Obviously, stocks are not arbitrarily chosen to cover. A new coverage on a stock usually reflects an encouraging future envisioned by the analyst(s). At times, increased investors’ focus on a stock motivates analysts to take a closer look at it. After all, who doesn’t love to produce something that is already in demand?

Needless to say, considering the average change in broker recommendation is preferable over a single recommendation change.

Analyst Coverage & Price Movement

The price movement of a stock is generally a function of the recommendations on it from new analysts. Stocks typically see an upward price movement with a new analyst coverage compared to what they witness with a rating upgrade under an existing coverage. Positive recommendations – Buy and Strong Buy – generally lead to a significantly positive price reaction than Hold recommendations. On the contrary, analysts hardly initiate coverage with a Strong Sell or Sell recommendation.

Now, if an analyst gives a new recommendation on a company that has few or no existing coverage, investors start paying more attention to it. Also, any new information attracts portfolio managers to build a position in the stock.

So, it’s a good strategy to bet on stocks that have seen increased analyst coverage over the last few weeks.

Screening Criteria

Number of Broker Ratings now greater than the Number of Broker Ratings four weeks ago (This will shortlist stocks that have recent new coverage).

Average Broker Rating less than Average Broker Rating four weeks ago ('Less than' means 'better than' four weeks ago).

The number of increased analyst coverage and improving average rating are the primary criteria of this strategy, but one should consider other relevant parameters to make the strategy foolproof.

Here are the other screening parameters:

Price greater than or equal to 5 (as a stock below $5 will not likely create significant interest for most of the investors).

Average Daily Volume greater than or equal to 100,000 shares (if volume isn’t enough, it will not attract individual investors).

Here are 5 of the 11 stocks that passed the screen:

EZCORP, Inc. (EZPW Quick QuoteEZPW - Free Report) is a leading provider of pawn loans in the U.S. and Mexico. In the recently reported third-quarter fiscal 2016, the company reversed its year-ago loss per share of 1 cent to earnings of 5 cents. This was driven by revenue growth from strong customer engagement and continued focus on expense management.

Barnes & Noble, Inc. is a leading retail bookseller and retailer of content, digital media and educational products in the U.S. The company has an impressive return profile with estimated 3–5 year earnings growth rate of 10%. The stock has appreciated nearly 32.8% year to date.

Arbor Realty Trust Inc. (ABR Quick QuoteABR - Free Report) is a specialized real estate finance company investing in real estate-related bridge and mezzanine loans, preferred equity, mortgage-related securities and other real estate-related assets. It has a dividend yield of 8.4%.

Simpson Manufacturing Co., Inc. (SSD Quick QuoteSSD - Free Report) , headquartered in Pleasanton, CA, is a leading manufacturer of wood construction products that operates through its subsidiary, Simpson Strong-Tie Company Inc. Simpson Manufacturing shares have risen 30.3% since the beginning of the year and its estimated 3–5 year earnings growth rate stands at 10%.

Bethlehem, PA-based OraSure Technologies, Inc. (OSUR Quick QuoteOSUR - Free Report) is a leader in point of care diagnostic tests and specimen collection devices. It develops and manufactures diagnostic products, oral fluid specimen collection devices, laboratory diagnostic products and other medical devices. Its estimated 3–5-year earnings growth rate of 15% shows promise and the stock has advanced approximately 33% so far this year.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance

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