How Much Do You Bench?…How Many Analysts?

28 June 2007

How much do you bench? – A stereotypical question asked by beefcakes in the gym.Flex

In the investor relations world the equivalent question would be “How many analysts cover your company?”

It’s strange, and I believe inaccurate, to believe that a company that has 20 analysts covering it has a “better” IR program than a company that has 10 analysts covering it.

There is certainly a distinction between quantity and quality.

I came across a company today that has 4 analysts that cover it.  Each of the analysts represents a relatively small boutique brokerage house. In looking at the trading activity in the stock for a given day it was quite apparent that none of those boutique firms actually trades the stock in a meaningful way. So, in that case, 4 analysts covering the stock means very little. The correlation between coverage and trading doesn’t seem to exist.

Something that is often overlooked is what I call “informal analyst coverage”. That’s when an analyst does not formally cover your company, does not actively write research on your company, but does follow your company’s developments closely and speaks to investors fairly often about your company. An analyst offering informal analyst cover typically represents a larger brokerage house (Goldman Sachs, Morgan Stanley, Merrill Lynch, etc.) and tends to focus their formal coverage around companies with higher trading volumes. Often times, informal analyst coverage can be much more valuable to a company, and to investors, than analysts who formally write research that goes unnoticed and unread.

Before analyzing a company’s analyst coverage ask yourself the following:
Is the quantity of the coverage impressive or is the quality of the coverage impressive?
Do investors value the analysts who cover the company?
Are the firms that cover a company actually trading that company’s stock?

Similar to judging a book by its cover, one should not judge a company’s IR program solely by the amount of analyst coverage.

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