Typically, three or four questions are asked.  But this week, the first question dominated the hour-long session. @meetthestreet asked:

Q1: Institutional Investor recently wrote about social media’s role in equity research: http://bit.ly/94w06K. Do you think this has legs?

Here is a snippet from the article:

Bolstered by the low cost of online publishing and the rising popularity of blogs, discussion forums and commenting, a growing number of niche web sites are creating opportunities for new forms of investment analysis to emerge — and for buy-side professionals, even those at rival firms, to collaborate and learn directly from one another. These social media web sites are supplementing, and in some cases supplanting, the traditional Wall Street information ecosystem that transmits sell-side investment research and stock calls to the buy side.

Here’s a recap of the conversation (a subset of questions evolved from the original question, so I have grouped these together to make it easier to follow along):

• @meetthestreet: “SumZero has attracted 4k institutional investors in 2 years in pure organic fashion. I think that there is something here.”
• @thomasros: “I like the “democratizing of information” idea of SM.”
• @SculptorIR: “Definitely think this trend will continue, as the market wants more information about market drivers.”
• @AVGoldberg: “Intuitively believe SM trend is here to stay but contradictory 2 analysts claim of limited access thru work & not using it.”
• @meetthestreet: “I know the founders of SumZero. I wonder if they can tell if their users are using it from home? I will ask.”
• @mcjennings: “Sounds like buy side analysts do have access to these specialized sites–sumzero, val invest club, distressed debt invest club.”
• @meetthestreet: “If SumZero grows 2 B 20k or 50k buyside they will B able 2 easily move markets & IROs don’t have the same transparency as w/ SS.”

@meetthestreet: “Any thoughts on how they could monetize their offering? This will be important to their long-term viability.”

• @meetthestreet: “Now institutional investors have 2 submit 2 ideas per year 2 gain access 2 the research pool. How can SumZero make $ from this?”
• @trevorheisler: “Implementing a paid subscription service would make sense to me.”
• @mcjennings: “If they are looking for revenue model, charge IROs for access, which will be necessary in some way shape or form.”

@meethestreet: Do you think that closed research networks pose a challenge to IROs as they become more popular?

• @SculptorIR: “Yes”
• @fredmcclimans: “Agree that closed research networks pose a challenge to IROs, but also a potential captive audience at some point?”
• @fredmcclimans: “How locked out are firms/IROs from SumZero? Any access at all? Or is data totally locked for all time?”
• @meetthestreet: “SumZero confirms users & only lets buyside in. Closed network. Plus its a 1 2 many network which can’t B managed/influenced by IROs.”

@trevorheisler: “Would you consider something like Covestor to be in competition with SumZero?”

• @meetthestreet: “I don’t think so. Covestor is a retail product. If you want to invest alongside best investors, then invest in their funds.”
• @trevorheisler: “Right. Guess a better question is, should SumZero go after retail as well, with a paid subscription?”
• @fredmcclimans: “IRO could then pose as retail investor?”
• @meetthestreet: “Agreed RT @fredmcclimans: RT @trevorheisler: Should SumZero go after retail as well, w/ a paid sub <iro could then pose as retail investor?”

As usual, the hour went by quickly.  I’d love to hear your thoughts about the discussion!

Don’t forget to join us every Thursday @ 11:00 a.m. EST. In the meantime, if you have any questions you’d like to submit for an upcoming #irchat, tweet @meetthestreet or send an email to sherylj@q4websystems.com and I’ll pass it along.

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Download the latest Q4 Whitepaper on social media for public companies.

We’re thrilled to announce our latest report on the use of social media by public companies for investor relations.  If you’d like to get right to the report you can download it here.

Last year we released two research reports on Twitter for investor relations.  At that point, our sample of 350 companies told us that 35% were using Twitter for IR, in the current report you’ll see this adoption is now at 65%.

However, it’s not all about Twitter. So we expanded our research to include Facebook, LinkedIn, Blogs, YouTube and SlideShare.  Their respective adoption rates for IR came in at:

• 37% Facebook
• 29% YouTube
• 10% Corporate blog
• 10% SlideShare
• 93% LinkedIn

Social Media Used by Public Companies for IR

We included LinkedIn because company pages are created automatically and now anyone can “Follow” any company.

What impresses me the most about the state of the market is just how many companies are using social media . We’ve included hundreds of examples in this report and we’ve literally just scratched the surface.

The complete report is 96 pages and has tons of stats, charts and web links.

Register on the landing page and we’ll email you the whitepaper right away.

We hope you enjoy it.

Let us know what you think in the comments below! Is social media for IR reaching a tipping point?

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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.

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Since the think tank, I have had several conversations with Tom and learned how he leverages social media to gain a “first mover advantage” and how he (and other analysts) use Twitter, blogs, facebook and various other channels to gain a more detailed mosaic of the company.  I found it quite interesting to learn that in a number of cases Tom has read information on a blog or social network that caused him to dig in further.

Seemed the best way to share Tom’s views was through an interview.  Last week we spent about 25 minutes talking about the capital markets, research, investor relations and social media.  I encourage you to listen or download the audio file:

Download MP3 File (11 MB)

During the interview you’ll hear Tom’s thoughts on:

• How his daily research activities have been affected by the social web
• How he manages risk when obtaining information on financial blogs and social networks
• Whether the use of social networks by a company influences his intent to cover them
• What kind of content companies should be sharing
• How financial blogs such as Seeking Alpha have changed the financial landscape

Hope you find it interesting.  Please let me know what you think.

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Presentation on SlideShare:

The findings are quite interesting and provide concrete evidence that institutional investors are using blogs and social networks to gather information.  The findings also point that social media is growing in importance for this key audience:

• 30% say that blogs, message boards and chat rooms have become more important to them.
• 42% read blogs (12% use social networking sites).
• 22% said definitely going to become more important.

More importantly for IROs, is the fact that the investment community is still looking to the information provided by the company as a primary source of information to make investment recommendations and decisions:

• 53% of participants selected “information direct from companies” as the source with most influence, while 83% ranked it in the top three sources of influence.
• 4% of participants included “new media” as the source with most influence while 12% listed “new media” among the three most influential sources (Business media was 5%).

Further to this, the findings show that they are also using social networks to make investment decisions or recommendations as:

• 47% of European and US institutional investors have read information posted on a blog which prompted them to investigate an issue further and for 20% this led to an investment decision or recommendation.
• 14% have made recommendations or decisions based on information they found through investigating something they read on a message board.
• 4% have made an investment decision or recommendation based on information they initially sourced from a social networking site.

We can surmise based on these findings that institutional investors are integrating blogs and social networks as part of their day-to-day routine as 58% of the respondents believe that new media will become increasingly important in helping them make investment decisions in the future.      

Social networks are providing another source of information for institutional investors to make investment decisions.  So a comprehensive IR plan that entails having a robust IR website and incorporates the use of social media will certainly enable a company to increase its reach within the investment community.

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Robert has spent about 20 years on Wall Street in various roles in equity research, trading operations and sales.  In light of the current economic meltdown (and some inquiries from his family and friends), he put this presentation together to answer the question “What is happening on Wall Street?”

In the past, the market was driven by speculation – people were making decisions whether to buy or sell a stock based solely on the information they had.  However, this prompted the need to find out and ask “If I am making a buy,  why is someone else selling?”  Does someone have access to proprietary information that I don’t?  There has to be a reason why they are taking the opposite stance.  With the Internet in its infancy access to proprietary information sources such as Bloomberg terminals were limited to a select group. Others were making decisions based on what they were reading in the newspapers.

When the Internet became important some information was actually trustworthy – one could find out the “intrinsic value”  of a company by visiting their website and accessing material information.  As a result, a complete picture could then  be formed based on their initial speculation and the additional tidbits picked up through an internet search.

Three questions then become evident:

1) What financial instruments do I buy?
2) Why should I buy these particular products?
3) How should I transact?

These questions were then framed from both a retail and institutional investor standpoint.  For example, a retail investor could call his broker to get their recommendation and execute a trade through them.  Similarly, an institutional investor would also make a phone call but it would be to the sales desk or trader to conduct the trade.

Whether a retail or institutional investor, the common denominator is the initial idea generation for why to buy or sell,  and where they access news about the company to make an informed investment decision.

As we know there are two sides on Wall Street:

1) Buy-side – such as Fidelity who have portfolio managers who manage client money; and
2) Sell-side – pitches ideas to buy-side, generate research reports, and trade execution.

Robert identified some industry wide trends that began to emerge between the buy side and the sell side as the reliance  on a firm’s research or access to proprietary information (such as Bloomberg) decreased in value and instead relied more  and more on outside sources of information such as the internet.

Trends between buy and sell-side:

1) Decreasing company coverage by sell-side firms;
2) Rise of independents, experts and the professional blogger;
3) News is everywhere, abundant and in many cases, free; and
4) Buy-side was challenged to do their own primary research.

As a result, there are not as many analysts as there were 10 years ago and the ones who are around have changed their behavior.   As the typical equity analyst now accesses the Internet more often as Google and other search engines make finding information quite easy.  In addition, other tools such as Capital IQ and RSS feeds are also being used.  In general, web 2.0 has made people want to contribute their ideas and share them with others through Twitter, LinkedIn and almost any other social network out there.

I can relate to everything that Robert has to say, in particular the way information was gathered to make investment decisions before the internet took off.  The reason being is that I worked on an institutional trading desk for a discount broker as a  trading support officer from 1996-97.  So I know first hand that the main tools used to gather information were reading the  Financial Times, Wall Street Journal, Globe and Mail and watching what transpired in the markets throughout the day on CNBC.

It has been a long time since I have worked on a trading desk.  Since that time, I have gained nine years of experience in investor relations as both a consultant and in-house IRO.  So as I progressed through the presentation I began tailoring  my thoughts in the context of Investor Relations and why it is important to understand how equity research is changing.

Implications for Investor Relations:

It has implications for IRO’s and IR consultants alike, as gaining analyst coverage is an important goal for companies, especially companies who don’t have any.  Or for companies with coverage, who want to begin targeting new institutional investors by expanding into international markets.   It was also pointed out that speaking with management is now over-rated.  So if you are in the midst of reaching out to the sell-side to get coverage, this is something to consider.  You now have to think  of other ways to get their attention…I think the answer is to make your company’s information more accessible through your Investor Relations website and the web at large. There a quite a few social media avenues to take, so figure out what works best for you client or company and test it out –  it is gaining in popularity and some have had initial success.

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