Do analysts create value for companies by initiating coverage? Coverage initiation of a stock by analyst(s) is actually a sign of increased investor keenness.

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.

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?

Interestingly, stocks typically see an incremental upward price movement with a new analyst coverage compared to what they witness with a rating upgrade under an existing coverage analyst. The price movement is a function of the recommendations from the new analysts. Positive recommendations – Buy and Strong Buy – generally lead to a significant positive incremental price reaction than Hold recommendations. In this regard, analysts hardly initiate coverage with a Strong Sell or Sell recommendation.

However, one should also look for the average change in broker recommendation rather than a single recommendation change.

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.)

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:

Prices 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 6 stocks that passed the screen:

Northwest Bancshares, Inc. (NWBI Quick QuoteNWBI - Free Report)

Discovery Communications, Inc.

American Superconductor Corporation (AMSC Quick QuoteAMSC - Free Report)

Theravance Biopharma, Inc. (TBPH Quick QuoteTBPH - Free Report)

Krispy Kreme Doughnuts, Inc.

Bats Global Markets

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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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