Skip to main content
Oct 31, 2023

Don’t believe the hype: Fundamentals and long-term investment potential still rule the day

Ten keys to quality sell-side equity research

As analyst coverage options shrink for small-cap and micro-cap companies and the UBS-Credit Suisse combination points to further equity research market consolidation as we approach 2024, the tall order of gaining institutional attention is increasingly top of mind for investor relations officers.

Procuring research is a key component of many public companies’ IR strategy but becoming a Herculean task for some, as heard in panel discussions at the recent IR Magazine Forum – Small Cap in New York. Smaller companies are feeling the effects of shrinking coverage options, often as bulge-bracket research emphasizes the largest and most lucrative equities to the banks, but also as experienced analysts exit through retirement, consolidation or – increasingly – a shift to IR roles.  

Company-sponsored research can be an effective solution to fill the coverage gaps for small-cap companies. It’s a prominent trend that we’ve observed at Sidoti & Company through a more than doubling of our CSR coverage universe in the past year and a surge in our average cap size beyond $500 mn and ranging toward $4 bn.

As more companies gain confidence in and approach Sidoti & Company about our CSR model, it’s important to understand the economics of the people providing your coverage, as well as what constitutes quality equity research.

Peter Sidoti, founder, chairman and CEO of Sidoti & Company, and Chris McGinnis, senior director of IR at branded office, school and technology products provider ACCO Brands, addressed this and offered solutions to IR professionals as part of the ‘How to enhance the quality of your research coverage’ panel at the forum, moderated by IR Magazine’s Lauren McDonald.   

Sidoti and McGinnis detailed the 10 basics of quality equity research that can help to shape IR executives’ process and ability to navigate a market where sponsored models run the gamut. Sidoti & Company’s CSR platform remains focused on our founding principles of independent research and corporate access.

Our recent experience at Sidoti & Company, a broker-dealer approaching 25 years as the leading independent provider of equity research on market caps up to $4 bn, is rated companies’ embrace of our CSR platform as an effective and arguably more credible option than coverage motivated by investment banking. We find that the far more expansive distribution of our CSR product enhances its appeal.

Here are Sidoti & Company’s 10 basics of quality equity research:

  1. Professional and objective analysis of a company’s long-term investment potential – not promotional, unreliable or misleading findings full of hype
  2. Well written and edited, held to the highest standard and with full and clear disclosures
  3. Analysts do not pander to management teams and have real veto power that requires the confidence in an investment thesis to put their name on the research
  4. Timeliness: published as soon as possible after EPS announcements and other news
  5. Regularity: research should be issued at least eight times per year
  6. Provides complete financial models, including cash flow projections and assumptions for future financing needs
  7. Price targets tied to business fundamentals and not relative valuations or obscure data
  8. Not all stocks should be rated ‘buy’ all the time
  9. Effective distribution
  10. Management of subject companies recognizes investment potential can withstand objective, independent analysis and that research is very different from investor relations.

Bill Holobowski

Bill Holobowski is associate director of research at Sidoti & Company
associate director of research at Sidoti & Company