Coverage initiation by an analyst(s) on a stock inevitably leads to increased investor enthusiasm. This is because investors assume that there is something in the stock that has attracted analyst attention. In other words, they assume 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 closer look at it. After all, who doesn’t love to produce something that is already in demand?

Importantly, the average change in broker recommendation is always preferred over a single recommendation change.

Analyst Coverage & Price Movement

Interestingly, price movement is generally a function of the recommendations from new analysts. Stocks typically see an upward price movement on 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 take notice of the stock. 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 five of the 11 stocks that passed the screen:

Safeguard Scientifics, Inc. (SFE - Free Report) provides capital and relevant expertise to drive technology-driven businesses. While Safeguard has underperformed the industry so far this year, this Zacks Rank #2 (Buy) company’s loss estimates have narrowed down to $1.39 from $2.66 over the past 30 days for 2018. The company’s bottom line is expected to witness around 68% year-over-year growth in the year.

Exantas Capital Corp. (XAN - Free Report), a real estate investment trust, has gained more than 23% this year, while its industry has declined 2%. The stock carries a Zacks Rank #2 and its estimates have moved 29.7% north for 2018 over the past 30 days. Earnings for the company are expected to rise 162.3% in 2018.

Champions Oncology, Inc. (CSBR - Free Report), a company engaged in the development of advanced technology solutions to personalize the advancement and use of oncology drugs, has seen its shares climb 106.4% this year, faring much better than the industry’s 1.3% increase. This Zacks Rank #3 (Hold) stock has seen its earnings estimates move up 25% for 2018 over the last 60 days. Earnings for the company are expected to rise 200% in the current year.

The Stars Group Inc. (TSG - Free Report) is a technology-based products and services provider to gaming and interactive entertainment industries in Canada and internationally. Shares of the company have gained 37.1% year to date, while its industry saw a 12.1% decline. The Zacks Consensus Estimate for current-year earnings has moved up 2% over the last 30 days. Earnings for the company are expected to grow 11.1% in 2018.

GDS Holdings Limited (GDS - Free Report), an information technology service provider, has gained 23.4% year to date, outperforming the 14.1% increase in its industry. This Zacks Rank #3 stock’s loss estimates have narrowed to 36 cents from 41 cents for the current year over the last 30 days. The bottom line for the company is expected to grow 29.4% this year.