INVESTMENT COMMUNITY PERSPECTIVE

Sadly, it is an all too common occurrence that a sector loses favour and, the next thing you know, analyst coverage starts to disappear. The first thing you should ask is why this is happening. Is it just your company or is it industry wide? What are the potential ramifications and what can you do about them?

The Why

The why is somewhat complicated because you need to assess developments in the investment dealer industry as research analysts are hired and fired. Perhaps you discover that some good research analysts have lost their jobs or been reassigned. So what is going on?

Over a long period of time, stock trading commissions have been shrinking, especially as the use of technology has increased. Trading no longer happens on the stock exchange floor; in fact, there is no longer a floor, just banks of computers. Trade is now executed via computers, which has led to greater efficiencies, but also lower commissions.

This phenomenon also means ongoing investments in technology are required. Consider that – in round numbers – stock trade commissions have declined from five cents a share to, in some cases, less than a penny a share. We all see the advertisements for cut-rate trade commissions. It is pretty well agreed that trading revenue alone cannot support the cost of sales, trading, equity research and all the accompanying support. Investment dealers are no different than your industry; they need to generate a return from capital invested and costs incurred. So if you work in an industry that has low trade volumes, no underwriting or mergers and acquisitions activity, your industry as a whole may be witnessing research coverage disappearance.

Just Us? Or Others as Well

The first thing you need to check is what is happening in your industry. Are other companies in your sector also losing research coverage? Are research analysts being fired or reassigned? That might be a good indication that you industry is experiencing a shift. The mining industry is notorious for expanding research coverage in a bull market and shrinking coverage in a bear market. Your industry’s shift may be permanent, or it may be cyclical. Either way, it affects your company immediately.

If just your company is losing coverage, do not be afraid to call and ask why. Find out if the reason is company-specific due to individual performance, or related to industry economics. At least you will understand what is happening, even though there may be little you can do. If the issue is company-specific, this may be a wakeup call for management. If it is an industry issue, at least you are not alone. Talk to your peers.

Now What To Do? Keep On Keeping On

If you find your company without any research coverage, you have a challenging road ahead, as you will have to do a lot more work yourself. Your shareholders will still want to hear from you, so you must ensure that your have direct lines of communication. You will need to dig to find who typically invests in your industry and who trades your stock; notes from past marketing and current trade statistics will be invaluable. There is nothing to stop your company from marketing, and nothing to prevent you from asking for the assistance of an investment dealer. Many investment dealers – though they may not maintain research coverage – may be willing to help market your company. Keep dealer contacts and do not hesitate to directly contact branch managers or key retail brokers. If you have a good story to tell, there will be investors interested.

More than ever, you need to stay abreast of your competitors, your industry and any research you can find, even if it is in another country. This also means you will need to maintain comparison tables for your company and its competitors. Know your industry’s key performance indicators (KPIs) and track them. Have the comparison tables readily available.

Potential Ramifications

Without an active and informed audience for your company, the stock price can start to sink, as investors give up and move on. Even if the fundamental prospects for your business are still very good, this means your cost of capital is increasing. When it comes to raising additional capital for your business, you may not only find it more expensive, but likely a lot more difficult or perhaps impossible.

Private Equity

Many companies looking to avoid losing good opportunities seek out private equity investors early, keeping them current on the business, so that they may serve as sources of needed capital. You may need to consider the private equity world as a new audience. Bear in mind, however, that private equity investors will be thinking of an exit for their positions before they invest a nickel, so you will need to be very clear regarding their exit intentions and methodology.

Orphan Stocks or Takeover Candidates

If you do not build lines of communication with the investment world and gain attention, your stock can become orphaned. Such stocks either remain orphans (effectively, they are private although listed) or – if their prospects are still considered strong – they may be taken over by another company, as industry players consolidate in order to gain critical mass and the attention of the capital markets.

Buckle Down, But Ask for Leads

If you lose research coverage, all is not lost, but you certainly have your work cut out for you. Keeping good notes and records will prove invaluable and do not forget to ask current investors, brokers and salespeople for ideas regarding other investors for you to visit; this can be in their best interests as well.

Dirk Lever is Managing Director, Institutional Equity Research, AltaCorp Capital Inc.