A great company does not always make a great stock. And a great stock does not always make a great stock for a sell-side analyst to cover. What are analysts looking for when they launch on new names? What can you do to get an analyst to consider you for their coverage universe?
These three questions can help you determine the likelihood of getting an analyst to begin to write research on your company.
Do you have the numbers?
While sell-side analysts are certainly interested in stories with sustainable demand and pricing leverage, revolutionary technologies, and flexible balance sheets, the reality of what kind of numbers you need to get analyst coverage can be more basic and obvious. For most analysts, the first numbers you need are market cap and trading volume.
Even though compensation is not directly linked to trading commissions, analysts must have a good business case for why their bank should pick up research coverage on your stock. Thus, they are somewhat dis-incentivized to give stocks with relatively lower market valuations or unappealing trading volumes a spot on their coverage lists.
Virtually all analysts, from those at top-tier banks to the ones at obscure boutiques, aim to produce research that will attract positive attention from the most active investors. There may be dozens of great stock picks out there that deserve a “Buy” rating and could help an analyst’s scorecard. However, if a stock is not something key clients can feasibly trade and take sizable positions in for some time, then the analyst (and the brokerage he/she represents) may not want to bother — even when your stock is poised to take off and perform outstandingly. Basically, don’t be surprised if an analyst you’ve been targeting doesn’t pull the trigger on coverage until after you’ve crossed a value inflection point.
Do you contribute to the analyst’s brand or franchise?
The company names on a coverage list affect analysts’ reputation and branding, and can motivate some analysts to do a deep dive into your story, market cap and trading notwithstanding. This might happen if, for instance, covering your company can help improve or solidify an analyst’s credibility or expertise in an emerging field or theme. It is not uncommon for some analysts to even roll out coverage on you, along with some of your closest competitors, at the same time as a means of putting a stake in the ground and attracting client attention.
It is also important to remember that access to management — not financial forecasts and stock ratings — is among the most important benefits investors look for from their analysts/brokerages. As such, it cannot be overstated how important the reputation and credibility of management can be for the research coverage decision. When is the last time any of us have read an initiation of coverage report that called out management as a risk factor? If the analyst has second thoughts about what it would be like to take you on a road show with investors, then he or she will most certainly have second thoughts about initiating coverage in the first place.
Are you doing a deal?
We can’t talk about gaining research coverage without bringing up the trump card: the banking deal. Granted, analysts aren’t as directly involved in soliciting and profiting from banking deals as they used to be before 2002, when the Sarbanes-Oxley Act passed. However, “investor education” for such deals remains a key part of many analysts’ roles, and most can certainly benefit from the exposure and additional volume that transactions like these create in the marketplace.
Are you hoping to add a specific new analyst to your ranks? Does your stock fit well into the analyst’s existing franchise and compare reasonably in terms of market cap and volume? If so, then there is probably no quicker way to nudge the analyst across the line than to try to involve his or her investment bank for your next financing round. Just be sure to consider how sensitive your existing analysts may be before potentially leaving out any of their banks.
In the end, no amount of research coverage is as important as a management team that knows how to consistently present its story, manage expectations, and execute.
We believe the most important thing any management team can do for investor relations is to run the business. To learn more about how Westwicke can help you stay focused on execution while navigating the public markets, read our Investor Relations Guide.