Lack of information creates inefficiencies that might result in misinterpretation 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 of a stock by analyst(s) usually depicts greater investor inclination. 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 worth.

Obviously, stocks are not arbitrarily chosen to cover. A new coverage on a stock usually reflects an encouraging 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?

Needless to say, considering the average change in broker recommendation is preferable over a single recommendation change.

Analyst Coverage & Price Movement

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 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:

Price 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 5 of the 16 stocks that passed the screen:

SunCoke Energy Partners, L.P. produces and sells coke used in the blast furnace production of steel in the United States. The company is headquartered in Lisle, IL. It has a Zacks Rank #2 (Buy) and offers a promising dividend yield of 13.73%.

TTM Technologies Inc. (TTMI Quick QuoteTTMI - Free Report) provides time-critical, one-stop manufacturing services for highly complex printed circuit boards. The company has a VGM Score of A. The company has expected earnings growth of over 471% for the current year. It has a P/E (F1) of 12.64, which is lower than the industry average of 14.00. Again, the a Zacks Rank #1 (Strong Buy) for the stock adds to the optimism. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Hanover Insurance Group, Inc. (THG Quick QuoteTHG - Free Report) , through its subsidiaries, offers various property and casualty insurance products and services in the U.S. and internationally. This Zacks Rank #2 stock flaunts a Value Score of A and has delivered an average positive earnings surprise of around 8.72% over the trailing four quarters.

Sanderson Farms, Inc. is a fully integrated poultry processing company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products in the U.S. The company sports a Zacks Rank #1 and a VGM Score of A. Furthermore, Sanderson’s earnings estimates for the current year have improved 4.2% over the last 30 days.

Columbus, OH-based Worthington Industries Inc. (WOR Quick QuoteWOR - Free Report) is a leading value-added steel processor and manufacturer of metal products in the U.S. The company has a VGM score of A and sports a Zacks Rank #1. Over the past 60 days, the Zacks Consensus Estimate for fiscal 2017 and 2018 increased 18.9% and 20.5%, respectively, to $3.15 and $3.11 per share.

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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