Abreast of the Market
Wall Street's map of stock coverage shrinks --- Fewer analyst reports mean companies do more of the talking
By Jeff D. Opdyke and Annelena Lobb
1081 words
26 May 2009
The Wall Street Journal Asia
AWSJ
M1
English
(c) 2009 Dow Jones & Company, Inc. To see the edition in which this article appeared, click here http://awsj.com.hk/factiva-ns [http://awsj.com.hk/factiva-ns]

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. Andreson says.

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 investors.

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 coverage.

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.

Verizon Communications 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 investors away.

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.

Raghavendra Rau, 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 28%.

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 potential investors."

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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