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 the lack of consistency in information creates inefficiencies that might result in misinterpretation of stocks (over- or under-valued). Thus, coverage initiation 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 issues 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).

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 five stocks that passed the screen:

ION Geophysical Corporation is a leading provider of geophysical technology, services, and solutions for the global oil & gas industry. Shares of the company have climbed 19.8% this year, faring much better than the industry’s 7.5% growth. This Zacks Rank #3 (Hold) stock has seen earnings estimates move up 72.7% for 2018 over the past 60 days. Earnings for the company are expected to grow 111.8% in 2018.

Bilibili Inc. (BILI Quick QuoteBILI - Free Report) , an online entertainment service provider in the People's Republic of China, shares have climbed more than 67% in the past month, faring much better than the industry’s 8.4% increase. Loss estimates for 2018 have narrowed to 4 cents per share from 5 cents over the last 30 days. The company carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BBVA Banco Francés S.A. , a full-service banker for large corporations, middle market businesses and individuals, carries a Zacks Rank #3 (Hold). The company’s 2018 earnings are expected to grow 40.4% (higher than the industry average of 9.8%) and 18.8% in 2019.

TIER REIT, Inc. is a real estate investment trust. Shares of this Zacks Rank #3 company have outperformed the industry in the past three months. Earnings estimates have moved 4.4% north for 2018 and 1.9% for 2019 in the last 30 days, depicting the stock’s potential to scale higher.

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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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