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 microscope definitely has some value.

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.

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, 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 the 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 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 three of the six stocks that passed the screen:

Arbor Realty Trust, Inc. (ABR Quick QuoteABR - Free Report) invests in a diversified portfolio of structured finance assets in the multifamily and commercial real estate markets. This Zacks Rank #1 (Strong Buy) stock has gained more than 13% in a year, outperforming its industry’s gain of just 4.6%. 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 four quarters with average positive surprise of 31.89%. The stock has seen earnings estimates move up 10% for 2018 over the past 60 days, depicting the stock’s potential to scale higher.

Ebix, Inc. is one of the leading international suppliers of software and e-commerce solutions to the insurance industry. This Zacks Rank #2 stock has seen earnings estimates rise 6.1% for 2018 over the past 60 days. The stock has gained more than 37% in a year, outperforming its industry’s gain of just 7.5%.

Calavo Growers, Inc. (CVGW Quick QuoteCVGW - Free Report) , a global avocado-industry leader and an expanding provider of value-added fresh food, has gained 37.5% in the past year, while its industry fell 12%. It has an expected earnings growth rate of 32.4% for fiscal 2018.

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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