Understand How the Buy Side Operates
The buy side is structured in many different ways, and knowing the set up and style of your audience is critical both to your pre-meeting preparation and to the level of detail you provide when you answer questions — and whether you take a more quantitative or qualitative approach.
The general buckets to understand are portfolio manager and analyst, but the roles and focus areas of these key players can differ, depending on the institution. So start by asking these questions:
- Does the portfolio manager focus on a particular sector or work across many sectors? What about growth versus value versus GARP? And small-cap versus mid-cap versus large-cap?
- Does the analyst focus on a sector or work more generally? Does he or she function as a team analyst or play a role in central research? Is the analyst cap-focused or all-cap? Is he or she value versus growth versus GARP — versus a general approach?
The buy side in larger firms
Larger firms will structure analyst roles the most granularly. Typically, these firms have analysts who sit in central research and focus on a discrete sub-sector, such as medical technology, and cover an in-depth list of 20 to 30 companies. This structure is likely to be further stratified by small-to-mid cap medical technology and large-cap medical technology analysts, who work with portfolio managers across a range of value-to-growth focuses and will tailor their investment pitch according to the style of the portfolio manager.
Many of the larger firms also have team analysts who sit within a particular team and work within a particular focus. A team analyst, for instance, might sit within the value team and focus on medical technology — but only for the value fund managers. With this set up, there are often multiple analysts within a large company covering the same stock, but with a different perspective.
The buy side in smaller firms
Due primarily to fewer resources, small firms often have analysts who either focus on an entire sector — all of healthcare — or who cover multiple sectors. These analysts may look at more than 100 companies within a given week, and often rely on quantitative screens to help them identify stocks. They rarely build their own financial models, unlike more specialized analysts, who are typically required to maintain a detailed financial model. Instead, they instead rely on sell-side models, which they’ll tweak or use for scenario analysis.
Understand what the buy side wants
Knowing your audience is critical. Buy-side analysts, who are often looking at dozens of companies, or who need to communicate with fund managers who are looking at dozens of companies, want to know your company’s three to four key investment highlights — the ones that matter. They attempt to summarize their analysis into these key points in an effort to figure out if your stock will outperform or not.
Consider, for instance, Company X, the largest player in a highly fragmented industry. The company will gain share as the market consolidates and they take share. So the key aspects to focus on in analyzing this company are their acquisition pipeline and their ability to integrate and make acquisitions, as these will be the critical drivers to beating revenue estimates.
The specialist-analyst will want to get into the nitty-gritty on each item that has an impact (whether positive or negative) on gross margin, while the generalist will simply want to know whether the gross margins are going to be greater or less than sell-side analysts are forecasting, and by what magnitude. A portfolio manager at a large firm relies on internal analysts to do the “work” — and are most likely just looking for the three to four bullet points to categorize your company.
A good analyst will ask you the same question six different ways to narrow in on a satisfactory response. If analysts are worried your sales will disappoint, they will ask you questions related to supply chain impacts, weather impacts, competitive impacts, price impacts, etc., until they’ve heard and seen enough to communicate internally with confidence — “This company is going to beat/miss sales estimates.”
Be careful with your body language, and don’t let it reveal things you do not want to communicate. Some larger firms even send their analysts through training programs to educate them on how to evaluate body language. Did you know, for instance, that there are repeating patterns of body movement that can be tracked when someone is lying?
What are your three to four key investment highlights? Know them and repeat them throughout your discussions with the buy side. The three to four they come up with may not be the same ones you want them to walk away remembering.
Buy-side analysts often churn through companies at a quick speed, only spending 30 to 60 minutes on a particular investment idea before making a buy/sell decision. If you can’t capture their attention in the first five to ten minutes, they will move on to the next company.
Want to learn more about preparing for investor meetings? Read this blog post by my colleague Mike Piccinino, “Tailor Your Investor Meeting to the Audience and Timeframe.” And reach out to Westwicke to start the conversation about how we can help.
ICR Westwicke is the largest healthcare focused investor relations firm in the country. We provide customized investor relations programs and independent capital markets advice to small and mid-cap healthcare companies.
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