How the Market Works: Getting Analyst Coverage
Analysts that are valuable to investors know both the company and the industry they are publishing research and making recommendations about. One firm I worked at required new analysts to write an industry report to demonstrate that knowledge before being allowed to initiate coverage of their first company.
One of the smartest analysts I worked with knew his companies well enough to answer questions from institutional clients who wanted to know the value of individual divisions of conglomerates without referring to a computer model. This level of knowledge and ability to quickly (and accurately) analyze the effect on future earnings is hugely valuable when a sale or acquisition is announced. Membership in Mensa helped him, no doubt!
Analyst coverage of your company can be reassuring to investors both retail and institutional. Getting analytical coverage is a worthy goal of a public company.
How the Research Business Works. Research is typically part of a brokerage firm’s institutional business along with sales and trading. The institutional clients pay brokers based on a number of criteria. Among these are research based investment and trading ideas.
No matter how compelling the opportunity, if the research coverage will not generate sufficient trading revenue to the sell side firm, the analyst will focus on other names. Be realistic, your stock will need sufficient float and trading volume to warrant the broker’s investment in research and trading. (See How the Market Works: Getting an Institutional Follwing)
Get to Know the Analysts. Make sure your Road Show schedules include sell side analysts. Get an understanding of which smaller firms are covering your sector. Look for firms that may have been trading your shares. (There are many sources of this information. The TSX puts a limited amount of it up free at www.tsx.com.)
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Many analysts like to hear new stories early, tracking progress as things develop. This is a business; brokers are looking for ideas that clients will pay them for in trading volume. Invest the time to understand what is needed to be attractive to this market. Pick up a sample of the brokerage firm’s research work in your sector when visiting the analyst to see which names are covered.
Even before the analyst writes a report, your company may get mentioned when the analyst is talking to clients. One institutional client I covered as a salesman never failed to ask my analysts, “So, what do you really like?” That sort of idea generation does not come with a recommendation or share price target but could lead to the buy side portfolio doing its own work on your stock.
Analysts periodically write industry research reports. While not offering investment recommendations, basic information on a group of comparable companies is often included. To anyone wanting more information, the next stop is your website. Make sure it is always up to date and includes your most recent marketing presentation.
Ask What Analysts Look For. When meeting analysts ask them what they need to see from your company in order to initiate coverage. The answers may help you plan the distribution between retail and institutional ownership that you target with financing activities. Your corporate development strategy is important.
Corporate Finance does not Guarantee Research. In fact corporate finance mandates cannot include that promise. Offer the dealer marketing time to arrange meetings with its clients one or two quarters following a financing to discuss your progress. Follow on buying to build to a full investment position can provide solid support when any selling pressure is evidenced.
When a firm starts trading a stock actively buy side traders will tend to look to that firm when trying to execute a trade. If a firm becomes “the box” on any issue it will have its own reason for wanting to be well informed on the outlook for the company.
The Report is Out, Now What? It is important once you get an analyst covering your company to keep them informed. Do not become remote when there are challenges. Analyst access to management is important as is your access to the investment audience.
Above all, make sure you are ready to spend time to support the marketing of his or her research work. The sell side firm will arrange the road show and you will enable them to provide a value added service to an audience they believe should own the shares of your company. Terribly simple really, no Mensa required.
Fred’s business career began in 1972 with Canada’s largest bank. In 1989, Fred left the bank’s Treasury Division to provide foreign exchange derivative strategies to ... <Read more about Fred Cowans>