Sell-side analysts hold big sway with the investment community, and can help your company’s potential to attract investors. To work in your favor, analysts must know the ins and outs of why your company or product represents the next best thing in the marketplace. They also need confidence in your company’s potential to make it to the next level.
While the reputation of sell-side analysts came under fire with conflict of interest stories this past decade, and new regulations helped level the playing field, analysts continue to play powerful roles in the marketplace, and companies are wise to nurture strong relationships. What’s it like in today’s market from the sell-side point of view? And how can you better your chances of making it on analysts’ coverage lists and receiving a coveted “Buy” rating?
In our second quarterly Wall Street Revealed webinar, “How Does the Sell-Side Really Look at Companies?” I tackle these questions with three longtime sell-side analysts from various sectors of the healthcare industry. The analysts include Ted Tenthoff, a senior research analyst for Piper Jaffrey who specializes in biotech’s drug discovery sector; Rick Wise, a managing director and senior equity research analyst covering medical devices for Stifel Nicolaus; and Darren Lehrich, a managing director covering healthcare services for Deutsche Bank. In the webinar, they tell stories from their side of the fence and dole out advice on making the most of your sell-side relationship. Summarized below are highlights of the conversation.
Q: How has the sell-side evolved over the years? What are some of the big things that either have changed, or that haven’t changed, in your time on the sell side?
Darren Lehrich (Deutsche Bank) – First, we’re being asked to cover more companies with similar or even fewer resources. So the breadth of coverage is quite large now for many teams. In my case, it’s become much more of a research-driven model in terms of how we select our coverage, versus banking driven, except in rare instances.
Second, corporate access has also become a bigger part of how Wall Street firms get paid. We estimate that about 35 percent of the commission pool is driven by how successful analysts are in bringing corporate management teams to investors.
Rick Wise (Stifel Nicolaus) – Our decisions still start with this question: what companies do I need to follow to be both well informed and competitive? In the universe of medical technology devices, a number of companies have to be included. So we start there. After that, I look for interesting companies with exciting stories and accessible, interactive management teams. I also look for companies that shed light on emerging markets in the medical device universe.
Ted Tenthoff (Piper Jaffrey) – How we operate, especially in terms of compliance and oversight, has changed a lot. But the fundamentals of our jobs haven’t changed much over the last decade and a half. It’s still about servicing our clients, making them money, and providing them with value-added ideas. The job is still to get out there and find good companies, try to be early, and bring them to clients.
Q: How much access to companies do you really need? What makes for a strong relationship?
Rick Wise (Stifel Nicolaus) – It’s fascinating to me that, across any range of companies, we’re either speaking daily or struggling to get companies to return our calls. I work hard to drive communication. My confidence in my ability to argue a thesis or be public at a controversial time in a company’s history is closely tied to whether I can get a company on the phone and know they’ll be responsive.
Darren Lehrich (Deutsche Bank) – For me, the most valuable way to build and develop a relationship is the non-deal road show, where I might have a chance to spend some significant time with senior management. That goes a long way.
We also like to do headquarter visits, where we can meet members of management beyond the CEO and CFO. When an analyst or investor visits, that’s an opportunity for a company to showcase the strength of its bench. Too many companies are CEO-centric, which can give the Street the wrong perception of a company’s depth.
Ted Tenthoff (Piper Jaffrey) – I put management at the very top when I do my due diligence on a company. You can have the best product in the world, but if you don’t have a team that can pick up the ball and run it down the field, you’re never going to get anywhere. There are always setbacks, but how people handle adversity is one of the most important parts of management.
I also agree with Darren that analysts and investors gain real confidence in what’s being done behind the scenes when the CEO and CFO share the limelight.
Q: How can companies lean on you in the non-deal road show?
Ted Tenthoff (Piper Jaffrey) – Non-deal road shows don’t have to be a big production. I believe in accomplishing as much as possible with as little travel as possible. Two or three short meetings can be really valuable. The key is to keep it targeted and not go after everyone.
I also work hard ahead of non-deal road shows to identify those one or two investors who aren’t shareholders but could be. Over a period of a few years, for a company to add one new institutional shareholder a quarter through non-deal road shows can have a material impact on its stock’s performance, and the sell side can help to identify them.
Rick Wise (Stifel Nicolaus) – I agree. Be strategic. When you’re in town for a dinner or meeting, calling up an analyst, even on a moment’s notice, is a fantastic thing to do. Analysts get excited, and organizations do, too.
Darren Lehrich (Deutsche Bank) – Don’t be afraid to look into a bank’s geographic strengths. Any bank, regional or multinational, will have markets where they have deep penetration and can be the most helpful in targeting investors and allowing you to benefit from their local relationships.
Q: How can companies successfully, or unsuccessfully, manage their time with you when things go sideways, or don’t turn out as planned?
Darren Lehrich (Deutsche Bank) – Quarterly earnings calls set the tone for valuation. My advice is to develop carefully scripted messages, rehearse, and prepare for the hard questions.
Rick Wise (Stifel Nicolaus) – Communication failures usually revolve around accessibility. When news comes out, and no one’s available, we’re left to tell the investor we don’t know, the company’s not returning our calls. That’s bad communication. Even on weekends, the company has to respond.
Figuring out how much to disclose – or not disclose – to a sell-side analyst can get tricky. If you need help managing your relationship with the sell-side or attracting attention, Westwicke can help. Check out our webinar replay for more insight, and contact us to continue the dialogue.