How to Fire an Analyst Part II
If you experience multiple instances of the following, management can get the change they likely seek:
1. Bad Corporate Access, and
2. Ambush Investor Meetings
However, management should always remember that Sell-Side Analysts are the salesforce of their respective stock.
If an analyst goes negative the best course of action is to limit them to just access to IR. You want to keep talking to them because over time, they may return to an aligned viewpoint on the company.
Once the “upgrade” comes that becomes a very powerful tool for the company to unlock shareholder value.
The other method for enacting research change involves four variables
Four Variables of Research Change
1. Significant Market Cap
2. Management / Company / Industry Prominence
3. Investment Banking Deal Flow
4. Treasury and Credit Services
Market Capitalization: The size and liquidity associated with significant market cap allows a management team to go direct.
Management / Company / Industry Prominence: Lots of deal flow and investor interest, then management can exert greater influence.
Investment Banking Deal Flow: Being acquisitive and/or capital intensive helps a lot.
Treasury and Credit Services: If a company utilizes a full suite of financial products i.e., investment banking, treasury, and credit services, then the investment bank can ill afford to treat you poorly.
The more variables you exhibit the more you are able to utilize the alternate method. The company has two levers:
1. Go Direct to Investment Bankers or Director of Research
2. Complaints Are Taken Seriously
The best examples of this in my experience come from Digital Healthcare and Data Center REITs
In Digital Healthcare, any analyst that issued a “Sell” rating on Cerner ended up being run over by a Mack truck. Management’s prominence and stature meant no one wanted to hear a negative view point, even if it was right. The company was a tent-pole stock in the industry driving future IPO valuations.
The other example comes from Data Center REITs. An oversupply recession causes REIT analysts to be skeptical of the fledgling cloud opportunity. A prominent analyst, at a prominent bank, in an industry entering a secular bull market, and an overly acquisitive mega cap company represents a recipe for research change. The magical “co-coverage” becomes the panacea.
Remember, overly steadfast negative research becomes a problem when an Investment Bank services a large, growing company, in a secular growth industry, with a penchant for M&A.
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