Coverage initiation by analyst(s) on a stock leads to increased investor enthusiasm. This is because investors generally assume that there is something in the stock that has attracted analyst attention. In other words, they assume that the company coming under the microscope definitely has some value.

Why do analysts initiate coverage? Of course, stocks are not randomly picked to cover. A new coverage on a stock is usually the result of a promising future envisioned by the analyst(s). At times, increased investors’ focus on a stock motivates analysts to take a closure look at it. After all, who doesn’t love to produce something that is already in demand?

Importantly, average change in broker recommendation is always preferred over a single recommendation change.

Analyst Coverage & Price Movement

Interestingly, price movement is generally a function of the recommendations from new analysts. Stocks typically see an upward price movement on 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 issues a new recommendation on a company that has limited or no existing coverage, investors take notice of the stock. 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).

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 three of the eight stocks that passed the screen:

Headquartered in Beijing, China Petroleum & Chemical Corp. , or Sinopec, is one of the largest petroleum and petrochemical companies in Asia. This Zacks Rank #1 (Strong Buy) stock offers a promising dividend yield of 5.01%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The company has also performed well on the earnings front, beating the Zacks Consensus Estimate in the trailing two quarters with average positive surprise of 746.1%. The stock has seen earnings estimates move up 5.8% for the current year and 4.6% for the next over the past 60 days, depicting the stock’s potential for price appreciation.

Bristow Group is a leading provider of helicopter services for major transportation operations in the United States, Gulf of Mexico and the North Sea and other major offshore oil and gas producing regions of the world, including Alaska, Australia, Brazil, Mexico, Nigeria, Russia and Trinidad.  

The stock has gained more than 53% in the last three months, outperforming its industry’s gain of just 7.5%. The stock carries a Zacks Rank #2 (Buy) and Bristow’s current year’s loss estimates have narrowed to $3.44 from $3.57 over the last 60 days.

Marcus & Millichap, Inc. (MMI Quick QuoteMMI - Free Report) operates as a brokerage firm specializing in real estate investments. This Zacks Rank #2 stock has seen earnings estimates move up 5.6% for the current year and 5.1% for 2018 over the past 60 days.

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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