Sell ratings got you bothered? Can’t shake the feeling that an analyst is holding a grudge? Wish you could just make them go away?
Let’s discuss your negative analyst strategy in 3 steps:
- Remember the big picture
- Avoid the pitfalls
- Engage and execute
1. Remember the big picture.
There will always be analysts who are negative on your company. They won’t go away. Why?
It comes with the territory. Because your stock trades in the public market, there will always be people who are bullish (buyers) and those that are bearish (sellers). At any given price, especially high ones, there will always be only so much demand for your stock.
Consequently, trying to turn every analyst into an Overweight/Buy is not a sound IR plan. In fact, having negative analysts might actually mean you’re doing something right:
Suppose your stock reached a price that ascribed maximum-value to every driver of your story. Would you, in this most ideal market scenario imaginable, expect the Street to remain all Buys? Of course not. We’d probably see some form of positive/negative parity.
Every analyst has sells. In the past it seemed like all stocks were Buy or Strong Buy rated and Sell ratings were like scarlet letters. Increased public scrutiny and regulations like Sarbanes-Oxley have changed the landscape for investment banks and their analysts. Today, much of the sell side has adopted greater levels of disclosure, especially regarding conflicts of interest and ratings. Research groups commonly adhere to balanced ratings distributions, including the practice of setting targets for “negative” ratings (e.g., 10-15% of coverage). With a potential negative rating for every 6 to 10 stocks covered, negative ratings are much more common.
Bottom line: you’re not alone. What once may have been an embarrassing blot on your investor relations reputation is now more commonplace. Even the best of your peers likely have negative analysts in their mix.
2. Avoid the pitfalls.
Taking it personally. We all know that excessively emotional or defensive reactions to criticisms rarely earn trust or change opinions. In the case of your stock, lapses in management composure can give critical analysts even more confidence in their positions. When faced with a negative analyst – especially if you have nothing to hide – don’t lose your cool.
Returning the favor. Often found alongside the first pitfall, the vindictive approach seems all too popular: Talk smack about the analyst. Denigrate their analysis. Whether intentionally or not, executives often can’t help but find ways to undermine their critics. This doesn’t work and often will cause an analyst to dig deeper to prove his or her point.
Avoiding and ignoring. Deny the analysts time for questions during calls. Don’t call them or respond to emails. Never offer them a meeting. Deny access to key executives. If this post were titled “how to get as many negative analysts as possible,” these would be the steps you would take. We don’t advocate creating any more platforms for negative analysts than necessary, but shutting them out is not a strategy. You must engage with them and continue to educate them on your story.
3. Engage and execute.
Disarm with transparency. Few things bolster negativity as much as uncertainty. And nothing takes the wind out of a negative opinion’s sails like company disclosure. If you have bad news, you are better off shedding light on it and “pricing it in” now than making it an ongoing topic for your analyst. In some cases, the “bad news” may not be news at all, especially to your investors. In these cases, disclosure would not even hurt your stock (and it could even help it).
Take an interest in your negative research. Negative opinions arise from many sources and motivations, and learning about the specific ones used by your analysts can pay dividends for you. All of the analysts who cover your company are smart. By trying to really understand their point of view you may learn something that may surprise you about your company or how you are perceived in the market. Reach out and ask questions about your analysts’ research. What fundamentals are they most sensitive to? Which investors are their views aimed at? What other sources of information are they relying on? Our clients have found that organized perception surveys (conducted by firms like Westwicke) can also be good catalysts for this effort.
Execute. Focus on what is in your control: How you set expectations, position your products in the marketplace, conduct your research and design studies, streamline your operations or explore business development. Analysts will always try to pick through your story and slap price tags on it, but you are ultimately responsible for managing that story’s substance.
At Westwicke, we help our clients find the outliers in consensus statements, and determine a sound investor relations strategy in the face of the inevitable negative rating. Contact us for more strategic information that can help with your IR decision making, and sign up for our newsletter to learn more about this and other IR-related topics.