As analysts are one of the most important information intermediaries in capital markets, initiation of coverage by them creates value for companies.

It is to be borne in mind that that the lack of consistency in information creates inefficiencies that might result in the interpretation 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 on a stock by analyst(s) usually depicts increased investor inclination. Investors, on their part, often assume that there is something in the stock that has attracted analyst attention. In other words, they believe that the company coming under the radar definitely has some value which can be tapped into.

Obviously, stocks are not arbitrarily chosen to cover. New coverage on a stock usually reflects an encouraging future envisioned by the analyst(s). At times, increased investor focus on a stock motivates analysts to take a closer look at it.

However, we have noticed that the average change in broker recommendation is preferred over a single recommendation change.

Analyst Coverage & Price Movement

Interestingly, the price movement is generally a function of the recommendations 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 limited 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 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 five of the 15 stocks that passed the screen:

Beazer Homes USA, Inc. (BZH Quick QuoteBZH - Free Report) designs, builds and sells single family homes. This Zacks Rank #3 (Hold) stock rallied approximately 25.6% in the last one year, outperforming the Zacks categorized Building-Residential/Commercial industry. The company flaunts a VGM Score of A.

EnerSys (ENS Quick QuoteENS - Free Report) , the manufacturer, marketer and distributor of industrial batteries, has a VGM score of A. Its expected EPS growth rate for 3–5 years is pegged at 13%. The stock rallied 44.2% in the last one year, outperforming 28.5% growth of the Zacks categorized Machinery-Electrical industry.

The company saw solid earnings estimate revision of 19 cents for this year over the past 60 days, with an expected earnings growth of 16.5%. Also, EnerSys currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

New York-based Greenhill & Co., Inc. is a leading independent investment bank that provides financial advice on significant mergers, acquisitions and restructurings. This is a Zacks Rank #3 stock that has seen estimates for the current quarter as well as year move north by 7 cents over the last 30 days. Moreover, earnings for the current year are expected to increase 115.2%.

New York-based Synergy Pharmaceuticals Inc. , a Zacks Rank #3 stock, is focused on the development and commercialization of gastrointestinal (GI) therapies. The current year EPS is anticipated to increase 26.6% year over year and 55.8% next year.

Paramus, NJ-based Movado Group Inc. (MOV Quick QuoteMOV - Free Report) is a designer, developer, marketer and distributer of watches in the U.S. and also globally. The stock sports a Zacks Rank #1 and posted an average positive earnings surprise of 10.53%, beating the Zacks Consensus Estimate in three of the last four quarters.

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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