Investor Relations and Buy, Sell & Hold Recommendations
In her article “Should CEOs lose sleep over analyst recommendations” Clare Harrison, IR Magazine’s Deputy Editor, poses the question “How much attention do investors really pay to analyst recommendations?”
I think she raises some interesting points in answering the question. So much so that I’d like to reinforce and provide my two cents from an IRO perspective on those points here. I’ll also provide some suggested tactics IROs can use to foster relationships and gain credibility with investors, and ways to help them make informed investment decisions about your company.
Recommendations are typically issued after quarterly earnings. This fact makes it difficult to determine how much the share price would have moved on the basis of the recommendation alone.
- While there are many factors that trigger investors to buy or sell, one would hope that quarterly financials would be seen in the context of the company as a whole – not just viewed as the only metric to base the company’s performance.
- IROs can help to ensure that financials are not the only factor in an investor’s decision to buy or sell shares of their company. For example, companies need to effectively convey their investment proposition and the market opportunity of their business. Having a comprehensive IR web site will help fill in the holes and should be current and up-to-date. In addition, now more than ever, investors want to know the long-term strategy as well as the roadmap to achieve their business goals. Lastly, communicating in good and bad times and consistently speaking with investors will help the company gain credibility. When taken all together, all of the previously mentioned tactics will help ensure that investors are exposed to all relevant aspects of a company’s story so they can get the complete picture and make an informed investment decision.
How much do Fund Managers rely on analyst recommendations? This is tough to prove and Clare rightly states that “no fund manager with any sense would admit to relying solely on the recommendations of analysts to do his or her job satisfactorily”
- While this would be an interesting conversation, having this information in my opinion is a moot point.
- Companies have buy and sell recommendations issued on them all of the time. The key is to be in tune with how investors are making their investment decisions. One way to do this is by establishing a rapport which means proactively reaching out to them. The more often you speak with them, the better chance you have to establish a rapport. Also, as the liaison between management and the investment community, regularly communicating with your investors will help you as the IRO become a credible source of information. Being well versed in the company and the ability to answer tough questions as well as providing appropriate access to management when deemed necessary will help you foster a relationship with them. Don’t forget, while it is important to be able to adequately answer questions, these conversations don’t have to be one-sided, and understanding how they make investment decisions is crucial to IR messaging and objectives. So go ahead and ask specific questions.
Good investment ideas come from equity salespeople – Clare cites a recent study conducted by hedge fund GLG Partners that argues that information gleaned from sales teams helps fund managers achieve better performance than recommendations directly from research departments.
- Clare makes an interesting point when saying this information is useful as it helps make the case for the company to cultivate a closer relationship with the sales team. One opportunity to do this is, is during a roadshow when issuers can end up spending a lot of time with analysts.
- Referring back to my point in #2 where I recommend proactively reaching out to your analysts on a regular basis, will help pave the way as a relationship would already be in the works through regular contact with them.
Non-consensus recommendations – She also notes that certain issues should trigger a re-evaluation of how time is spent with analysts. For example, she says “When there is disagreement between analysts about a stock, the recommendations of certain analysts are more likely to influence your stock price. It should be no surprise that the GLG study found recommendations from large, global brokerage firms have more of an impact on stock prices than smaller brokerage firms.
- There is bound to be some differing opinions among analysts regarding your company. And yes it is logical for analyst recommendations coming from larger brokerage houses to have more clout.
- However no matter what the recommendation is and whether it is coming from a large or small brokerage house, IROs should still regularly speak to analysts. You have a right to ask your analyst to review the report. You could even try asking them how they came up with their recommendation – but be prepared to be shut out as analysts oftentimes have complicated financial models that have taken many years to put together, so they aren’t likely to tell you their trade secrets. That said, I adhere to the old adage “do not ask, do not get”, so in the very least I would ask for a sneak preview of their report before it is issued. There are a few benefits to doing this i) it gives you a reason to contact them; ii) it gives you the opportunity to clarify anything misleading or blatantly erroneous in the report; and iii) it gives them a “fact” checker right from the source.
Analysts who don’t engage with investors – Another dilemma Clare highlights are “rogue” analysts who don’t engage with issuers - IR people occasionally complain that investors ring up citing an analyst report the issuer isn’t on the distribution list for.
- I have not had a lot of experience with this issue – but it doesn’t mean it isn’t happening.
- If you get blindsided by this, get them to send you the report. Then let them know that you would like some time to review and you’ll get back to them. This will give you some time to investigate the report and the author. In any case, whether they have given a buy or sell recommendation you should reach out and introduce yourself.
With the many places that investors can access to get information about your company, it is difficult to determine whether investors put a lot of stock (no pun intended) on analyst recommendations. That said, IROs should make it a point of knowing what is being said by this important audience. Whether there is a buy, sell or hold recommendation on the company, the IRO should take it upon themselves to proactively reach out and foster a working relationship with them. The tactics I have previously outlined can help IROs foster relationships and gain credibility with investors and help them make informed investment decisions about your company.
Related posts:
- Institutional Investors and Analysts Increasingly Using Blogs and Social Networks for Research
- An IR perspective “Equity Research in the Age of the Web”
- Task Force to Modernize Securities Legislation in Canada Releases 65 Recommendations
- How the Buy and Sell Side Trade your Stocks Today
- IR Best Practice: Get to know the Buy-Side
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