The majority of investors rely on some formal analysis when making their investment decisions. For public issuers, sell-side coverage is valuable for attracting investors who might not otherwise have you on their radar screen. Ultimately, the role of the sell-side analyst is to convince institutional accounts to direct their trading through the trading desk of the analyst's firm. Clearly, establishing formal research coverage should always be a priority for a public issuer.
The challenges for small-caps
In general, the sell-side focuses more on larger-cap companies, due, at least in part, to the larger flow of trading commissions. As a result, many smaller companies have fewer sell-side analysts covering their stock. In fact, obtaining sell-side research coverage can be one of the biggest challenges for small-caps.
While many small-cap companies try to make up for their lack of sell-side coverage by paying for research from independent providers, paid for research simply does not measure up. For starters, the credibility of paid for research is often in question (as companies might only post, or pay for, positive reports). In fact, according to research by Marcus Kirk at the University of Florida, “paid-for analysts issue relatively less accurate forecasts and more optimistic recommendations than sell-side analysts.” Add to that, paid for research simply does not have the leverage of sell-side research – the sales force.
Persistence pays off
It might be difficult and it might take considerable time to win the attention of the sell-side, but persistence typically pays off. To increase your chances, in addition to strong business fundamentals, you need to make sure your investment proposition is compelling and effectively communicated to the right audiences. Simply put, the investment in a well-executed investor relations strategy with an emphasis on building relationships with the sell-side is time, money and effort well spent.
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