Too many analysts as much of a problem as too few

Photo courtesy of Matt MacGillivray on Flickr

Photo courtesy of Matt MacGillivray on Flickr

Rob Swystun, Pristine Advisers

We all know that you can have too much of a good thing and many large companies these days are saying that they have too many analysts while smaller companies are struggling to get attention.

The big companies can easily — too easily, as it turns out — attract sell-side analysts who are drawn to their high trading volumes and lucrative commissions while the small companies and their relatively meager commissions attract a sparse number of analysts.

IR Magazine recently conducted research about sell side analysts and discovered about one quarter of companies globally believe they have too many analysts while another quarter believe they have too few.

Too many

According to the magazine’s research, almost half of mega-cap companies and three out of 10 large-cap companies believe they have too many analysts.

Aside from market cap size, being in a hot sector can also attract an inconvenient number of analysts, even for small companies. Companies of all sizes in tech, media, consumer, energy and healthcare all complain of having too many analysts following them. 

Sometimes a tsunami of analyst attention can hit a company without warning due to reasons outside of the company’s control. 

When the big recession hit in 2008, M&A activity in the banking sector dried up and the major bulge-bracket firms moved their research efforts to smaller banks they would never have bothered with prior to that.

One of the problems with attracting so much attention is that when you have a large number of something, you end up attracting the bad with the good and the bad usually make themselves stand out. (Just ask any woman with an online dating profile.)

Shady analysts can make real nuisances of themselves by repeating rumors and speculation to drive trading and the lazy ones just regurgitate company news and issue poor research and outdated earnings models because they never bother to call. You’ll get these undesirables no matter how many analysts you attract, but simple math tells us that the more analysts in general you attract, the more undesirables you attract, too.

Another problem is that all these analysts are jostling for position to ingratiate themselves with companies‘ senior management. So, in contrast to the ones that never call, you are getting a lot of analysts that are calling and wanting one-on-one time with executives, which can become overwhelming for an IRO to have to deal with.

And with so many analysts, the excessive attention can actually water down any perceived positives that come with attracting a lot of attention. Each analyst (the ones that do their work, anyway) has an opinion on a company’s stock and all these sometimes conflicting opinions can just be a pain for a company’s IR while not actually creating any value for investors. 

As with most things, it’s not the quantity of sell side analysts that matters, but the quality of their research and analysis that matters. 

There really is no optimal number of analysts and the best strategy, according to Dennis Walsh, vice president at Boston-based IR consultants Sharon Merrill Associates, is to continually foster new relationships with non-covering banks “because you never know when an existing analyst will leave his or her company or decide to drop coverage on your firm.”

More useful than a ton of analysts covering your stock is having a diversity of analysts both geographically and by industry focus.

Too few

Having too few analysts covering your stock can send a message to analysts to steer clear of covering it. High coverage connotes lower risk of surprises for analysts, so a lack of coverage raises a red flag for them.

Often, declining commissions are cited as a reason for losing analyst coverage or not being able to attract any. This is especially true among small and mid-cap companies, as IR Magazine’s research showed about six out of 10 small-cap firms said they had inadequate sell-side coverage compared to none for mega-cap firms. However, some small-cap companies did also feel like they had too many analysts and some large-cap companies also felt they had too few.

Some issues that might be negatively affecting a company’s sell side coverage are:

  • Poor financial results;
  • A muddled strategy;
  • Uncommunicative executives;
  • A small and stretched management team unwilling to invest time in IR activity;
  • Major strategic repositioning;
  • Having a complex set of unrelated businesses; and
  • Being in a unique niche with no easy benchmarks.

A Change for the better?

While attracting sell-side analysts can be difficult, sometimes a change in leadership will do the trick if the new CEO is well known and well respected. A new CEO’s reputation can travel well and attract attention. That worked for Trifast, a global contract manufacturing and logistics company, that lost all sell side activity in 2007 after poor financial performance for years. Once the company brought in a well-known CEO and replaced its management team, analysts started trickling back based on the trust and respect garnered from the reputations of the new top dogs in the company.

Overhauling management, however, is not an easy solution for a lot of companies. For the majority of companies, a campaign of proactive outreach, accessibility and analyst education is the more practical route to go.

Even if a company does change things up through  strategic repositioning, acquisitions, divestitures or restructuring, it will need to show positive results from those changes before analysts will give you their attention.

Probably the most obvious thing that attracts analysts is their potential at making money from a company’s stock. If the analysts and their firms aren’t going to be making much commission from your stock, they’re not going to be too interested in it, are they?

Things that could signal low earnings potential for an analyst include:

  • Small cap size;
  • Modest trading volume;
  • Lack of volatility;
  • Moderate growth;
  • No corporate finance needs; and
  • Limited investor interest.

Even the potential for small earnings can attract some analysts, though, and smaller companies can leverage the reputations of their larger counterparts by making the case to analysts that by covering the smaller companies, analysts will better understand market drivers that affect the larger companies in their coverage portfolio.

Walsh also urges companies that find themselves lacking coverage to mount their own company-sponsored, non-deal road shows once per quarter and solicit invitations from analysts who don’t yet cover the firm to present at their conferences. Doing these things will build relationships, he says, and demonstrate interest in the company among analysts‘ buy-side clients.

Another way smaller firms can attract attention, Walsh says, is through independent, boutique research houses, which sometimes actually seek undercovered stocks and like to initiate contact themselves.

So, while it can be difficult to attract analyst attention when you don’t have it, like attracting ants, if you put out a little sugar, you can be rewarded. But beware; there is apparently such a thing as being rewarded too much.

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One response to “Too many analysts as much of a problem as too few

  1. Pingback: 3 current trends in the financial marketplace |·

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