EDITOR: | October 3rd, 2013 | 4 Comments

How the Market Works: Getting Analyst Coverage

| October 03, 2013 | 4 Comments

ProfessorAnalysts 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.)

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 Cowans


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>

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  • Tracy Weslosky

    Fred – Thank you for your piece on securing institutional interest but I have to say with regards to analysts…is there really a market here? I have one fatal flaw with many analysts and that is that they cannot own the stock that they are talking about. My point is that they have nothing to lose and how can you really make buy and sell recommendations until you know what that really means to your bottom line? We all know that the so-called Chinese wall between investment bankers and analysts is increasingly thin, and with many of the boutiques challenged by market conditions — they often cannot afford the salaries of the best or the brightest as I see the top analysts often end up in executive positions in companies…they were following. So let me just throw a bigger discussion into the ring and let’s discuss the future of the analyst and how this job has already been redefined. As a final note, I love the talents cultivated in analysts, and cherish great writers on all levels….and have numerous analysts that we appreciate their commentary on our site. So I would love to hear some other people’s opinion on this matter. Thanks again Fred — there is always a great deal of wisdom in your words. Tracy

    October 3, 2013 - 9:17 AM

    • Sudhir Padiyar

      Tracy, I see a point in what you say about analysts not being allowed to own stocks that they recommend. That said, i have an observation that makes me believe that analysts (or sales people also for that matter) should not hold positions in stocks that they recommend to clients. Its only human to start getting biased by personal positions, thereby compromising on clients interest on many a instances. I have seen analysts ignoring actual developments, writing them as one offs, influenced or governed by their positions. Maturity levels do play a part, needless to mention. But then, will it be possible to keep this clause flexible or restricted to mature participants only? May be not.

      I agree with Fred that the industry has changed dramatically over the years. Not only because of rising costs and shrinking commissions, but more importantly because of shrinking lead times for news flows and increased volatility. Data is now available real time to which the markets react without waiting for the actual analysis. This gets magnified in the backdrop of increased volatility of the markets and at a time when fund performance (in general) has been under stress. In turn, the buy side demands from the sell side have increased dramatically. So, to summarize; volatile markets, lack of sufficient ideas, demanding clients et al is sufficient enough to exert serious pressure on sell side analysts. Its not everyone’s cup of tea to be able to take this pressure and continue their research career. In such a scenario, established analysts have either made sufficient monies to take care of themselves and thereby tend to move into executive positions in companies they track or manage personal portfolios or ‘retire’. That said, there are loads of serious analysts (experienced), who only breathe and dream ‘stocks’, still continuing their capital markets career as if there were no pressure.
      My observations (as above) stem from my last 2 decades of experience in the Indian capital markets. I would love to hear the experience in other markets.

      October 10, 2013 - 11:22 PM

  • Fred Cowans

    Tracy, the investment industry has changed dramatically over the course of my forty years in business. Regulatory requirements are increasingly expensive to bear and that is in large part why we are witnessing consolidation on both buy and sell sides of the street. Additionally, there was a period of time when Canada was over brokered.
    Today investment managers are trying to lower their fees to keep products competitive. They are paying less for sell side services. Bank owned firms are putting pressure on independent firms and can afford to as the profits are coming more from wealth management currently than trading and corporate finance activity, the traditional revenue sources of boutique firms.
    Research is done in-house when affordable and sourced from the sell side when that makes economic sense. Where analysts gravitate has a lot to do with personalities, but that is the possible subject of an entire article!

    October 3, 2013 - 10:25 AM

  • Jim S.

    Providing really valuable information here Fred and Tracy. Now can you get me that analyst? LOL. Great job providing information that supports the endeavors of both the investor and the company. True resource.

    October 4, 2013 - 3:13 PM

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