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These 5 Stocks Make Great Buys on New Analyst Coverage

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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 information asymmetry creates inefficiencies that might result in stocks being misrepresented (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 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 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:

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 five of the nine stocks that passed the screen:

Anixter International Inc. is a leading global distributor of communication products used in building enterprise and service provider data, voice, and video networks. The company is also a leading distributor of specialty wire and cable products to original equipment manufacturers and industrial companies for maintenance and repair options.

This Zacks Rank #3 (Hold) stock rallied approximately 33.1% year to date, outperforming the Zacks categorized Electric Parts Distribution industry. The company flaunts a VGM Score of A.

EnerSys (ENS - Free Report) , the manufacturer, marketer and distributor of industrial batteries, has a VGM score of A. Its expected EPS growth rate for 3–5 years is pegged at 13%. The stock has rallied 42.7% so far this year, outperforming 22.2% growth of the Zacks categorized Machinery-Electrical industry.

The company saw solid earnings estimate revision of 19 cents for this fiscal over the past 60 days, with an expected earnings growth of 16.5%. Also, EnerSys currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

John Bean Technologies Corporation (JBT - Free Report) is a leading global solutions provider to the food processing and air transportation industries. This Zacks Rank #1 stock surpassed the Zacks Consensus Estimate in the trailing four quarters, with an average positive surprise of 17.98%. The stock has climbed approximately 69.2% year to date, better than 22.3% growth of the Zacks categorized Machinery-Thermal Processing industry.

CRH Medical Corp. offers healthcare services and products. This Zacks Rank #3 stock has a VGM Score of B and has surged approximately 76.2% year to date, outperforming 0.5% growth of the Zacks categorized Medical Instruments industry. The Zacks Consensus Estimate for full-year 2016 earnings stands at 17 cents, up 50%.

Airgain, Inc. (AIRG - Free Report) designs, develops and engages in engineering antenna products for original equipment and design manufacturers, chipset vendors, and service providers worldwide. The stock carries a Zacks Rank #3 and has seen a rise in earnings estimates by 19 cents over the last 60 days for the current year.

The stock has rallied 88.5% year to date, beating the broader industry growth of 27.9%.

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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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