The environment for sell-side analyst coverage has changed over time, due to a growing number of boutique banks and fewer bulge bracket firms. In addition, with consolidation in the sell-side industry, many analysts are now covering upwards of 40 companies at a time, some with a large team co-covering stocks and others with very little additional support.
Many factors go into determining an analyst’s coverage list, including institutional interest, industry bell-weathers and thought leadership, liquidity, a broader relationship with the investment bank, perceived valuation, and potential upside. For a small cap company, adding sell-side analyst coverage can be a challenge, and the path is not necessarily linear nor is it the same for each company.
Here are a few things to consider as you contemplate analyst coverage:
Evaluate your company’s fundamentals and structural limitations.
Market cap, trading volume, and ownership profile all factor into who might cover your stock. Consider both the individual analyst or analyst team as well as their platform. For example, if the market capitalization of your company is less than $100 million, it may not make sense to target analysts at bulge bracket banks for near-term research coverage. We still suggest developing relationships with these analysts, but set reasonable expectations.
Consider the analyst’s business rationale and what the value would be for them to get involved with your stock. Is there an opportunity for new institutional investors to take a meaningful position in your stock? Are you part of a sub-sector that the analyst is already covering so that they can leverage industry knowledge and work that has already been done? Will it be “easy” for the analyst to understand your company and initiate coverage? Furthermore, are there milestones that may provide an opportunity to determine an entry point, such as a pending FDA approval, clinical trial, or commercial availability on the near-term horizon? The upcoming timeline is an important consideration in introductory discussions with potential analysts.
Consider your peer group.
IR practitioners may only consider analysts that cover comparable companies given their understanding of the space. Now, with more boutique banks emerging and gaining traction, the door opens to presenting your company as a unique idea to analysts looking for opportunities to differentiate their coverage. Smaller firms will have fewer analysts, but those analysts will likely have more flexibility with the coverage selections than bulge bracket firms.
Consider your analyst options.
Another angle to consider is the analyst’s total coverage universe and his team or structure. Have they recently initiated on new names, added associates, etc? It is especially important to consider if there is an associate analyst that may be moving up and carving out a new group of companies or a subsector of his/her own. Sometimes the best chance to add coverage is to work with junior analysts, as they are branching out from the senior analysts and building their own coverage list.
Have patience. This is a relationship building process.
It is not uncommon to host an introductory call and maybe two or three follow-up meetings with different members of management, facility tours, or even customer calls before an analyst starts to build a model. They may need to see the company making progress and meeting milestones. We have had clients who engaged with analysts for a year or more with coverage being “imminent.” It isn’t always in the analyst’s control when coverage is launched, so be patient. In the meantime, keep the dialogue open. It might take a few repeated steps, phone calls, reviews, and favorable market conditions before coverage is initiated.
Identify other ways to build the relationship.
Presenting at a target investment bank conference can be a good step. Additionally, you will often have the opportunity to go on a bank-sponsored non-deal roadshow (NDRS), despite the analyst not having formal research coverage. These events benefit all parties; analysts can see how their institutional clients and sales team are responding to your story and management, and you can see how well-orchestrated the events and meetings are, how engaged your audiences are, and what it may be like to work with a particular analyst and corporate access team.
Consider all of these events as part of the relationship-building process. The associated visibility with the investment community provides additional upside. For conferences, Research and Investment Banking are often given a certain number of invitations they can issue. If you’re included in that count, consider it a sign of progress.
Ask the analyst if he or she thinks a conference will be a good use of time. We rely on this feedback, as analysts do not want companies to have a disappointing experience. While bulge bracket analysts may not be on the short list to pick up coverage in the near term, you can build a relationship with them through participation in their conferences. In fact, we have had several small-cap clients attend the Morgan Stanley Healthcare Conference to participate in one-on-one meetings only. While these companies did not have presentation slots, the schedules for investor meetings were strong and the conference worthwhile.
We consider participation in NDRS, analyst-arranged investor calls or events, and bus tours additional signals that an analyst or sales team sees potential for marketing your company to investors. Providing corporate access to company management is important for many investment banks, so working with them is a win-win opportunity for relationship building and additional exposure to investors.
Develop a relationship with the bank and the analyst.
Given the prolific movement of analysts among investment banks, we suggest that you develop a relationship with both the analyst and the broader bank. Some analysts that were previously at bulge bracket banks are now at emerging growth banks and smaller boutiques. It’s important that you carry the relationship with the analyst to his/her new seat. Conversely, we suggest developing relationships that are broader than just the analyst; when there is movement, continue to deepen your relationship so that you don’t lose momentum. You can then easily build a new relationship with the incoming analyst, which will be supported internally at his respective bank.
In addition, we suggest having open conversations about coverage goals so that you can better understand what criteria the analyst and platform need to cross the threshold. If there needs to be a relationship with the broader investment bank in order for coverage to materialize (and this happens often), determine if this is a path that makes sense for your company while you continue to target other analysts.
Are you making progress, or do prospects remain low? We can help you create a strategy for additional analyst coverage. It’s important to create target lists, as well as update and evaluate them consistently with a critical analysis of the outreach efforts. Our relationships across Wall Street with analysts and associates, corporate access and sales teams, and investment bankers are broad and deep. We have served as a valuable partner to our clients in this process of facilitating relationships, gauging feedback, and creating realistic targets for coverage. We’d love to help you think through this process.
Leigh Salvo, Managing Director