Over the last five years the healthcare market has performed well, and we’ve seen a large number of IPOs. Recently, however, times have been a little tougher and many of these newly minted IPOs are beginning to experience what life as a public company is like in a more volatile market environment.
In times like these it is more important than ever to keep your head down, run your business, hit your targets, and deliver on the promises you have made to your investors. All of this should be complemented with a comprehensive investor relations strategy that enables you to understand how to take full advantage of the resources you have at your disposal now that you are a public company. One such resource is the sell-side analyst.
While the role of sell-side analysts has evolved over the years, they remain a valuable asset when used properly. It’s important to remember that the sell-side analyst is essentially a conduit of your story to the vast multi-billion dollar investment community. And let’s admit it, we all want the sell side to have the most favorable rating and be the top ranked investment idea when talking to investors . . . especially during difficult times in the market.
Here are a few things you can do to get the most out of your sell-side research coverage.
1. Make sure the sell side understands the fundamentals of your business. Just because a sell-side analyst covers your company, it doesn’t necessarily mean they understand or are up to date on the fundamentals of the business like you are. Proactively reach out to your sell-side analysts, especially the ones that you may not hear from as consistently. Manage this follow up around some type of “event” such as the quarterly call, a press release, or when attending a conference. Remember, if your sell-side analyst doesn’t feel comfortable with the fundamentals of your business model or growth strategy, they probably won’t be the best advocate for the stock.
2. Respect analyst ratings and remember they can change. I recall all too vividly the CFO of a really great company, which I liked a lot, yelling at me for downgrading its stock after it had reached my price target. While it can be tough to see a downgrade to your company, refrain from putting that person in the “penalty box.” Instead, understand the analysts’ ratings are based on some expectation around a stock’s anticipated performance relative to a target price. Holding a grudge against an analyst for a rating will just make them want to dig in more with that rating. Instead, use the rating change as a challenge to stay in front of that analyst and seize every opportunity to better educate them on the fundamentals of your business and why those fundamentals justify continued support for the stock. And always remember that ratings can change.
3. Be firm-agnostic when evaluating the role of your analyst. Chances are your current group of analysts represents firms from varying sizes and reputations. Some analysts are from firms offering amazing conferences while others are from firms with exceptional institutional relationships. Some analysts are from firms with huge distribution capabilities and others are analysts known for the quality of their research. That diversity is exactly what you want. But periodically we hear a company downplay the significance of having an analyst from one of the smaller firms. We understand that everyone wants the bulge brackets to cover their company, but don’t worry about the firm an analyst represents. Instead, learn to take advantage of what each one uniquely brings to the table. And don’t forget: The sell side is a game of musical chairs and one day that small-firm analyst may very well be at that bulge-bracket firm that companies so desperately seek.
4. Get your sell-side analyst involved. As we mentioned, each analyst may be valuable for a specific reason, but in every case we want them to be in a position to understand and speak favorably about your company to the investment community. The goal is to have an engaged group of analysts covering your stock. One easy way to keep them engaged is to involve them in your investor relations outreach activity. We recommend our clients spend anywhere from 15 to 20 days a year conducting investor relations-related activities. One of the best ways to keep analysts engaged is to reward each of them with a day or two at a conference, hosting a non-deal road show, sponsoring a topical conference call, or hosting an investor site visit.
5. Leverage the vast knowledge the sell side possesses. The depth of knowledge many of the sell-side analysts possess can be truly impressive. Whereas the buy side must cover hundreds of companies often spanning multiple sectors, the sell side generally researches and focuses on one area. This “inch wide and a mile deep” approach means they have a lot of great intel ranging from what the potential industry head- or tailwinds are, to what your peer group is doing or saying, to how the investment community is currently thinking about you. Take advantage of this intel to better understand how you are being perceived by the markets.
Being a new public company presents you with a whole new set of challenges. Managing the sell side can be one of those. Turn this into an opportunity and get the most out of your current sell-side coverage. Don’t let their coverage of your company get stale, get to know them, learn how they can help, and get them involved.
An engaged sell-side analyst can be a valuable source for generating interest in your stock. But remember, the most important thing to do is run your business. Do that well, and things will fall into place. At Westwicke we are passionate about investor relations and we thrive every day at helping our clients adapt and succeed as a public company. Reach out to us if you would like to learn more about how we can help.