The shrinking sell side poses a big challenge to public companies, forcing management to get out more and pitch investors directly, says Michael Mayhew, co-founder of Integrity Research Associates, which studies securities analysts and advises institutions which ones to use for various investment themes.
The universe of analysts has been hit hard by Wall Street layoffs, the demise of Bear Stearns and Lehman, and distressed mergers of big I-banks, Mayhew blogs in a June 1 post.
From September 2008 to mid-May, he quotes FactSet as saying, 26% of all sell side reports on small cap companies were announcing dropped coverage. Withdrawal of coverage accounted for 17% of all mid cap reports and 16% of large cap reports.
Mayhew also cites an academic study that found an individual stock that loses analysts typically underperforms its industry for 12 months following the dropped coverage, then recovers and outperforms in the second 12 months.
The loss of coverage both deprives buy side investors of research and hurts public companies themselves, Mayhew says:
The result of this trend has been that many companies have been orphaned, losing some if not all of their research coverage. If history is a guide, the stock price of these public companies is likely to underperform their peers, at least over the short-term. This will force many company executives to increase the amount of time they spend meeting with investors to tell their companies’ stories.
Investor relations professionals still must cultivate sell side analysts, as well as seeking out independent research firms (ones that work for investors, not the pay-to-play shops). And more than ever, companies need to go direct to the buy side.