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Apr 04, 2023

How to manage bearish analysts

Should you allocate more time to engaging with negative analysts?

During the latest IR Magazine Think Tank – West Coast, held in Palo Alto last month, two willing participants engaged in a lively debate in a room full of IR professionals.

The session looked at whether it is more important for IROs to focus their time on analysts who are bullish on company stocks or attempt to bring round bearish analysts.

Launching the debate, the first speaker – arguing on the ‘for’ side – said that while every analyst is important, if companies have sell-rated analysts, that could potentially throw off consensus, so it could pay in the long term to engage with them then and there.

He explained how his firm made a point of doubling down and spending more time with the analysts and marketing with them so they could get a better understanding of the company story. ‘Your investors are going to reach out to those analysts to get their view so not spending time with [them] could do a lot more damage than good,’ he said.

Don’t waste your breath

IR Magazine Think Tank - West Coast

Arguing on the opposite side, the second speaker said: ‘If the story and the numbers don’t match, that’s your problem. As an analyst, they don’t have it wrong. If they have a sell, they think you’re wrong. The way you’re going to prove them wrong is not by spending time arguing a court case; you’re just wasting your breath.

‘Go out there and prove them wrong. Prove them wrong by putting up great numbers. Don’t prove them wrong by having an argument with them.’

Instead, the speaker suggested that companies focus their time on analysts who know them well, ‘because they’re your voice out to the buy side.’

IRO must step up

Throwing a spanner into the mix, the moderator then asked the two speakers to switch views and argue against their original standpoint. Taking both sides into the equation, the second speaker then suggested one reason companies might take time to turn around bearish analysts is if the analysts are factually wrong.

‘What you want to spend a lot of time on is where the story is fundamentally off,’ he explained. ‘That story is a combination of the numbers, your business strategy and what to expect. When management credibility is weak, the IRO must step up and spend more time to fill in the credibility [gap].’

IROs are often pulled in a lot of different directions by both the buy side and the sell side, noted the first speaker. Arguing against focusing on bearish analysts, he said that, fundamentally, the most important client base is buy-side institutional shareholders.

‘It’s important to have good relationships with your sell-side folks, but you’re not going to win all of them – so lean on the good ones who understand the story,’ he added.

At the beginning of the debate, a question was posed to the audience in relation to engaging with analysts. Delegates were given the choice to either agree or disagree with the statement: ‘IR teams should allocate more time to engage and convert analysts who have a sell rating on their stock’.

Proactive stance

The poll found 71 percent of the audience agreed with the statement, while only 29 percent disagreed.

Rounding off the debate with some final thoughts on how to engage with negative analysts, the first speaker said the first thing a company should do is ‘understand the why’ – why are those analysts negative? ‘The other thing I would say is that IROs should be professional but don’t kowtow, don’t be afraid to call up the analyst,’ he concluded.

Finally, the second speaker suggested taking a proactive stance and being responsible for the negative analyst rating. ‘As an IRO, it’s not the job of the CEO or the CFO to really manage analysts, whether they’re difficult or the biggest fans of your company,’ he pointed out.

‘With sell-side analysts, as long as you stay somewhat proactive, remain transparent and actively communicate with them, then don’t stress: you’re doing what you can.’

IR Magazine Think Tank - West Coast speaker

How to manage bearish analysts