Most investors bank on research done by analysts to avoid inefficiencies triggered by lack of information. When it comes to coverage initiation, analysts naturally play a pivotal role.

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

Obviously, stocks are not randomly chosen to cover. New coverage on a stock usually reflects a reassuring 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? Hence, we often find that analysts’ ratings on newly-added stocks are more favorable than their ratings on continuously covered stocks.

It is needless to say, the average change in broker recommendation is preferred over a single recommendation change.

Influence on Stock Price

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 very 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).

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 four of the seven stocks that passed the screen:

Enterprise Financial Services Corp (EFSC Quick QuoteEFSC - Free Report) operates as the holding company for Enterprise Bank & Trust that offers banking and wealth management services to individuals and corporate customers. The stock has seen earnings estimates move up 8.6% for 2018 over the past seven days, depicting the stock’s potential to scale higher.

This Zacks Rank #2 (Buy) stock has an expected earnings growth rate of 45.8% for the current quarter and 37.2% for 2018. Positive earnings estimate revisions indicate the stock’s potential for price appreciation. The stock has gained more than 23% in the last six months, while its industry grew 14%.

LCI Industries (LCII Quick QuoteLCII - Free Report) is a manufacturer and supplier of components for manufacturers of recreational vehicles and adjacent industries in the United States and internationally. The stock carries a Zacks Rank #3 (Hold) and has a trailing twelve-month return on equity (ROE) of 23.6%, higher than the industry’s 16.6%. Full-year 2018 earnings for the company are expected to grow 16.6%, higher than the industry’s 12.9%.

Simpson Manufacturing Co., Inc. (SSD Quick QuoteSSD - Free Report) , through its subsidiaries, designs, engineers, manufactures and sells building construction products. This Zacks Rank #3 stock has gained almost 33% in the last six months, outperforming its industry’s gain of 21.7%. The company has an expected earnings growth rate of 21.3% for 2018.

Synlogic, Inc. (SYBX Quick QuoteSYBX - Free Report) develops synthetic biotic medicines for the treatment of urea cycle disorder and phenylketonuria. This Zacks Rank #3 stock has an expected earnings growth rate of 49.2% for 2018, much higher than its industry’s growth of 8.9%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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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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