Abreast of the Market
Wall Street's map of stock coverage shrinks --- Fewer analyst reports mean companies do more of the talking
26 May 2009The Wall Street Journal Asia
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A YEAR AGO, investment
analysts from seven brokerage firms shadowed the financial progress of
Intevac, a small, Santa Clara, Calif., technology firm. Today, a lone
analyst is all that remains.
"That coverage was pretty
important to us," says Jeff Andreson, Intevac's chief financial
officer. Among other woes, losing coverage "hurts liquidity, making it
harder for our institutional investors to build or sell positions," Mr.
Intevac isn't unique.
Whether due to layoffs, attrition, retirement or brokerage firms moving
analysts around, Wall Street's map of corporate coverage is shrinking
these days. The process is standard for market upheavals and was made
worse by the demise of Lehman Brothers and Bear Stearns,
which covered hundreds of companies. It is leaving smaller companies
like Intevac with fewer analysts to help tell their stories to
Between September and
mid-May, a period capturing the worst of the troubles for Wall Street
and the economy, there were more than 2,200 cases of analysts formally
dropping coverage of a company, representing about a quarter of research
reports during the period, according to data compiled by FactSet Research Systems Inc.
By comparison, from September 2006 to mid-May 2007, capturing the run
toward the Dow Jones Industrial Average's all-time high above 14000,
just 6.4% of research reports were issued to announce an end to
Small companies aren't
the only ones feeling the pinch. Mid-cap and large-cap companies have
been losing analyst coverage in vastly larger numbers as well. There
were nearly 1,350 instances of analysts dropping coverage of mid-cap
stocks, or 17% of all analysts reporting in the period, more than triple
the pace of 2006-07. More than 15% of analysts tracking large-cap
stocks dropped coverage, more than double the previous rate.
lost five analysts in recent months, according to FactSet. Yet Verizon
still has more than 20 analysts shadowing the company and barely feels
the loss. In an email, a spokesman for Verizon said the number of
analysts covering the company has remained "fairly consistent. Several
firms dropped coverage, but have been replaced by others."
Lost coverage can be
meaningful not just to smaller companies but to their investors.
Analysts link corporate management with both institutional and, to a
lesser degree, retail investors. Though they are faulted at times for
being too cozy with companies and too bullish on their stocks, analysts
build a mosaic of information and analysis that can help drive interest
in a particular company. The good ones do an even better job of
understanding when corporate operations are struggling and, thus, warn
When that coverage fades, stocks feel the impact.
Research from finance
professors Kent Womack at Dartmouth College and Ambrus Kecskes at
Virginia Tech has found that in the year coverage is dropped on a stock,
those shares typically underperform the industry average. Moreover,
"liquidity begins to dry up," Mr. Womack says. That has the knock-on
effect of warning away institutional investors fearing an inability to
build a position without sharply moving the share price or, more
important, exiting a position quickly if necessary.
associate professor of finance at Purdue University, together with Ajay
Khorana of the Georgia Institute of Technology and Simona Mola of
Arizona State University, found that a company losing coverage
completely is more likely to have a weak share price and problems in its
operations than similar performers that have coverage. And such
companies are more likely to be delisted from a stock exchange than
similar performers. The researchers controlled for analysts' tendency to
drop coverage of struggling companies.
"If you have no outside
coverage," Mr. Rau says, "the outside public, the people who are buying
and selling shares, are less likely to know true information about the
firm, and are at a big disadvantage against insiders." That, he says,
leads to investors having "less of a willingness to buy the company."
During the September to
mid-May period, the Dow Jones U.S. Small-Cap Total Stock Market Index
was down 32%, while the Dow Jones Industrial Average was down nearly
In the last several months, NCI Building Systems,
a Houston maker of metal buildings and components, has lost three
analysts, cutting its coverage in half. The biggest effect, says Chief
Financial Officer Mark E. Johnson, "is that it hurts with respect to
Though losing an analyst
"is disappointing," Mr. Johnson says, existing shareholders know enough
about the company and management that the loss doesn't have a major
impact on them. "But when you have more coverage, you're going on more
road shows with analysts and attending more investment conferences. When
you don't have coverage, that limits the opportunity to participate in
events that would attract new investors."
Scholastic, a publisher of children's books including the U.S. editions of the Harry Potter series, has lost coverage from Goldman Sachs Group, J.P. Morgan Chase and Citigroup,
among others, leaving only three analysts still tracking the company.
One result: company executives now spend more time on the road, meeting
with potential institutional investors, because Scholastic has fewer
Wall Street analysts to pitch their story.
"It has changed how we
communicate with investors," says Jeffrey Mathews, Scholastic's vice
president of corporate strategy and investor relations. "We spend much
more time with institutional investors than we did five years ago."
Goldman says the Scholastic analyst left the firm and coverage was
dropped. Citigroup declines to say why it stopped following the company and J.P. Morgan declines to comment.
Of course, some companies
aren't concerned with the current state of affairs. LeCroy, a Chestnut
Ridge, N.Y., maker of electronic testing devices, has just two analysts
after losing several in the past year. But when an analyst pulls out,
"it's barely noticeable," says Tom Reslewic, LeCroy's CEO.
Analysts "have any number
of reasons for wanting to follow you or for dropping you," Mr. Reslewic
says. "It wouldn't surprise me at all if I woke up tomorrow and some
large firm decided to cover us for some specific reason. Analysts come
and ago, and I don't even think about it."
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