We Have Too Many Analysts
Benjamin Graham begins Security Analysis with a dedication from Horace’s Ars Poetica:
Many that are now in honor shall soon fall, and those out of honor shall soon be restored
What great advice to keep in mind as everyone remains one trade away from humility. Currently, executives and investors face a market of seemingly endless prosperity around rising valuations. Nevertheless, investors must always be vigilant as the current status quo can change on a dime.
Which brings us to today’s topic: We Have Too Many Analysts
Whenever I attend Investor Relations networking events, I hear the all too common refrain, “I have too many analysts.”
Often times, when I go to executive interviews, I hear a similar refrain, “I have too many analysts, and only a few provide really good research.”
The struggle seems to revolve around an inability to feed 20, 30, 40+ analysts. IROs are likely overwhelmed at the perception the company needs to provide corporate access to the entire analyst roster, which is just not the case.
A good IRO can manage such a seemingly unruly environment. After all, the fundamental rule of Investor Relations success is accessibility. Is the IRO available and responsive to questions. Therefore, the seemingly unruly group can be managed at a minimum by simply being accessible. Having a strong IRO, dedicated to the role, rather than doing IR off the sides of desks, makes managing the situation significantly easier.
Here are four reasons why I think complaining about too many analysts misses the mark:
Your Company Is Must Own: If you operate a company with 20+ analysts then you represent a must own stock. Working for a must own stock means you have an incredible platform. A company with 20+ analysts means the stock is must own and the interest will serve to amplify your reputation and career. Said benefit works for both the IRO and executive team.
Research as Sales and Key Relationships: IR and executives are best served to look at the Sell-Side as their stock sales force. When I interview with executives I always hear, “We want long-only investors.” If management’s goal is to target specific long-only investors a larger Sell-Side coverage base matters significantly. You never know which bank/broker has the magic relationship to get that buy-side investor to pull the trigger and buy the stock.
A great way to target a specific long only revolves around asking that buy-side firm who should do an NDR so we can meet you. Doing so shows that you understand that sometimes said buy-side firm needs to pay a lesser-tier relationship to management. The larger the sell-side base the less likely you miss a key relationship.
Analyst Bench Strength: The current market environment continues to drive contraction of Sell-Side Research. Supporting a small analyst base becomes a key risk. In today’s environment, you can easily go from eight analysts to four analysts overnight. A shrinking coverage list will only hurt your ability to make investors care about your story.
Quality Does Not Matter: Many complain about the quality of an analyst’s research. He or she does not publish enough. He or she does not do any deep research on us or the industry. And on and on. The only time a company should care about the perceived quality of the research is if the analyst is really negative or completely wrong about facts. The reason research quality does not matter goes back to research as sales and key relationships. You may perceive the research as bad, but the magical long-only you seek may want to pay said analyst. Helping facilitate that transaction will help the company get the long-only into the book.
Successful Investor Relations revolves around being accessible and available to answer questions. Having too many analysts will only amplify that success. Remember having a lot of analysts means your platform matters, and can serve to amplify not only the IROs career, management’s as well!
