For many small and mid-cap companies, the challenge of securing analyst coverage is nothing new. In recent times, however, this difficult landscape has become an even rockier affair to navigate due to factors such as changing investment banking economics and the bundling of research and corporate access fees in Europe, courtesy of Mifid II.
Set against this tricky backdrop, how can small and mid-caps gain traction with the sell side? It is arguably storytelling that remains at the heart of the potential for small and mid-caps to attract interest, with many elements of their businesses often providing a more compelling weapon in their narrative arsenal than those of their large-cap counterparts.
Many small and mid-caps are leading the charge when it comes to innovation and are often trailblazers within their sector. Others play a crucial role in growth within an emerging sector, while others still are using their nimble attributes to simply do something better, or faster, than the industry has seen before.
If relating the story of these attributes is key, it’s clear that the small or mid-cap company needs to ensure it is translating its business narrative into something that will interest the sell side, and do so in an engaging manner.
Brad Delco is senior vice president of finance at US transportation and logistics company JB Hunt, and is well versed on this issue, having spent 10 years working on the sell side, mostly covering small and mid-cap companies. He advises IROs to keep their stories straightforward and focus on any distinguishing factors.
‘Analysts and investors will gravitate toward a simple story that is easy to digest,’ he says. ‘A differentiated story, and how quickly an analyst can understand the opportunity, greatly increases interest in covering a stock.’
Building strong relationships with analysts and providing opportunities for them to experience a window on the world of the company can also reap rewards, adds Delco.
‘Analysts generally like to cover companies where they see opportunities to provide value to their clients,’ he says. ‘A company’s willingness to give an analyst corporate access – whether at conferences, non-deal roadshows or virtual meetings – will make coverage more appealing.’
The effectiveness of events as an engagement tactic can work both ways when trying to attract new sell-side followers, as Brian Vereb, head of IR at US financial services company Bread Financial, points out: ‘We attended the conference of one of the analysts we were targeting and made sure to maintain ongoing outreach and engagement. IROs need to maintain their engagement and be patient. Aligning your disclosures with companies that the analyst covers, where possible, can also be useful.’
IROs within small and mid-caps that are finding analyst coverage a tough nut to crack can also boost their chances of success by going back to basics and carrying out research to identify potential opportunities, suggests Delco.
‘IROs should identify which firms and analysts cover their competitors, and target those that do not overlap,’ he days. ‘I regularly get asked by others in our industry which of our covering analysts would be a good fit for their company.’
As arduous as the process can seem, it’s worth small and mid-caps remembering that, when it comes to analyst coverage, quality not quantity should prevail, and the dropping of analyst coverage isn’t always necessarily a bad thing.
‘We are fortunate to be in a position with strong coverage,’ says Vereb. ‘We currently have 15 sell-side analysts, and have fluctuated between 14 and 18. Of those we have lost, only half were regretted departures and the others were not the right analysts – with the wrong industry focus – to be covering our company, in our opinion.’