IR and the sell side: A primer
This article was produced in association with ELITE Connect. It was originally published on the ELITE Connect platform.
While the role of sell-side analysts has evolved over the years, they remain a crucial IR asset when used correctly. To get the most out of your relationships, here are a few things to keep in mind.
1: They don’t think like the buy side. Two big-scale major surveys of buy-side and sell-side analysts show that different inputs and incentives shape their respective research. Among the findings are:
i) Sell-side analysts rank private communication with management as more important than their own primary research, recent earnings performance or the latest filings when determining earnings forecasts and stock recommendations. By contrast, buy-side analysts say corporate filings are more useful than quarterly conference calls, management earnings guidance and recent performance.
ii) Hardly any buy-side analysts believe sell-side stock recommendations are useful. Instead, they value the sell side for industry knowledge and the frequency with which it communicates with management. ‘Buy-side analysts look to the sell side for information about other investors’ opinions or holdings,’ says study co-author Nathan Sharp, associate professor of accounting at Texas A&M University. ‘They also often rely on the sell side to quickly get up to speed on a new industry they cover.’
One sell-side analyst surveyed underlines the importance of direct contact with management: ‘If I call up a money manager, a hedge fund or whoever, and I’ve got a call to make on a stock and I can say, Hey, by the way, we were able to spend 20-30 minutes talking to senior management, then boom! Their ears are straight up.’
iii) Analysts don’t like to share information with other analysts in earnings conference call Q&As. Another analyst reports: ‘There are three things that can happen when you ask a question on an earnings call: one, you sound like a complete idiot; two, they give you no information at all; three, you get a really insightful answer but you’ve just shared it with all your competitors – so I don’t ask questions on calls.’ That’s why it’s important to schedule individual analyst callbacks following each call.
2) Reciprocity is the foundation of strong analyst relationships. Acknowledging this fact will ensure you get the most value from the sell side. ‘Timeliness is of the essence to analysts,’ comments Alan Katz, vice president of investor relations at waste management and energy firm Covanta. ‘They are focused on getting the latest news to their buy-side clients as fast as possible. That means IROs must be proactive when it comes to exchanging information.’
For Katz, that entails, for example, reaching out to analysts when he encounters consistent buy-side concern about specific topics. ‘That ensures they aren’t caught without an answer when speaking with clients,’ he explains. ‘In exchange, they may be more forthcoming with information on market dynamics, your competitors or investor interest.’
Katz extends his ‘balance of asks’ philosophy into the realm of investor targeting. ‘Corporate access has become a key part of analysts’ compensation and how they make money for their firm,’ he notes. ‘So we’ll sometimes let them introduce us to clients that we may see as less-than-perfect shareholders. In exchange, however, we’ll push them to work hard to get us meetings with investors that we see as a good fit but which may not be as advantageous for them.’
3) Analysts have become jaded because they participate in so many meetings. They bore easily and can tell when management is bored. ‘You’ve got to get your top points across right away,’ says Richard Newman, COO of executive presentation specialist the Newman Group. ‘Too many presentations are a rote recitation of numbers rather than a compelling communication of vision. You have to consistently communicate enthusiasm.’ Newman suggests that standing while on the phone can be a powerful way to add energy to conversations.