IR Magazine: Should You Pay for Equity Research

Should you pay for equity research?

March 19, 2014 | By Tim Human

Sell-side cutbacks have left more companies contemplating issuer-sponsored equity research. But not all providers are equal

As many companies know through painful experience, a lack of research coverage is a serious impediment to attracting new investors. Without it, investors may view a business as unvetted or too difficult to value. 

View the balance of the article, in which Tim Human included some of our thoughts, here: http://www.irmagazine.com/articles/sell-side/20098/should-you-pay-equity-research/

Additional thoughts: We would argue that issuer-paid research is no more biased than most sell-side research which is provided by investment banks that have raised money for the subject company and/or hope to secure other fee income from banking, M&A or other advisory work. No one shows up to Wall Street to work for free. Everyone has some sort of agenda. 

Other key benefits of such research is that it can provide forward earnings estimates - in major earnings estimate services like First Call - for Companies that have little or no formal research coverage and therefore have no estimates or estimate consensus. Such estimates are helpful to investors who are screening for stocks or taking an initial look at a company - it helps them gauge the growth rate and efficiency of the organization. 

The other benefit is helping to bring disparate information all into one place - financials, management comments and strategy, recent releases, industry valuation metrics, competitive and industry factors, and valuation parameters. It's 'Cliff Notes' for equities. I expect that investors will do their own work to analyze and value the Company - but this research helps get you their radar screen.  It's principal benefit is in idea generation.

Lastly, as there could be alleged some aspect of "implied endorsement" when a company distributes a report that has been written on them - this concern makes most companies refrain from distributing either sell-side or company-sponsored research reports. Given this dynamic, the distribution channels the research provider brings to the effort are particularly important. If a research report is issued in the forest - few will read it without some proactive intervention.  Finally, 'marketing' a research report is also very important.  That helps connect all the dots - putting the Company and management together with the report and the investor - to ensure that the analyst and/or PM really focus on the story.  It's a multi-step process leading up to actually getting an investor engaged in a new story. 

Our thanks to Tim Human for raising this important issue - and showing how different times may require different measures.

Social Media – Leveraging Existing IR Assets to Attract New Eyeballs

In April 2013 the SEC made a bold, progressive step in condoning social media for Reg. FD compliant disclosure. IR professionals must now figure out how or if to follow that lead.

While 70% of IROs report NOT using social media, we believe engagement will grow as precedent mutes legal concerns and the benefits become better understood. In our view social media enables more frequent and granular investor dialogues fostering greater understanding through additional data, anecdotes, perspective or review. It can also play a key role in crisis communications, provided the channel is established well in advance.

But the most compelling argument for IR social media is that it provides an easy low-cost way to leverage your investment in existing IR assets, putting them before new investors, bloggers & media with similar interests. It’s no panacea, but over time builds a growing base of awareness and interest that can favorably influence your stock price. To be fair, the potential benefits of IR social media seem more compelling for smaller companies who struggle to develop investor interest against market currents that favor size and liquidity.

The Myth of Non Engagement

For now, social media’s importance to IR seems a near-sighted measurement of investors NOT engaged in the medium by similarly positioned IROs. Yet a brief visit to StockTwits, SeekingAlpha or Twitter confirms existence of a sufficiently large and growing audience to warrant our attention. Social media has also been validated by hedge funds who filter it to guide investment decisions, by Bloomberg’s integration of Twitter feeds into its financial information platform, and lest we forget, @Carl_C_Icahn, who’s 59 posts to date have drawn enormous Wall Street attention and 123,000 followers.

Your Company is likely the subject of an active social media dialogue that is shaping investor perceptions without you. 

And guess what? Your Company is likely the subject of an active social media dialogue that is shaping investor perceptions without you. Doesn’t it make sense to balance those communications with approved company messages?

You’ve got my attention; What would a social media IR program look like?

Because social media is an adjunct to your existing IR communications, the same disclosure rules and regulations apply. Despite the SEC’s comments, we do not recommend using social media to initiate material disclosures and our comments reflect that posture. However, we do recommend following the SEC’s guidance to publicly state which social media channels you use for investor relations, thereby protecting your social media efforts.

A formal social media program and plan should be developed along with policies and designated persons for the review and posting of messages and responses. This policy should be reviewed by management and counsel and updated at least yearly for any changes in practice, participants or approved social media forums.

Leading IR social media forums include Twitter, SeekingAlpha, StockTwits, SlideShare, LinkedIn, Facebook, Boardvote and Stockr. To reflect the unique needs of investors, public companies should establish standalone IR social media accounts. The “IR” suffix is frequently used and easily differentiates IR content from other social media communications (ex.  @CompanyIR).

We recommend using the same account name across all channels if possible. There is no cost to set up most accounts, though it does take some time to create a professional profile and presence. Protect account access by using strong passwords and 2-step authentication. Once set up the posting of approved messages takes just a few minutes and will become an  automatic part of your communications work flow.

But what are we posting? How do we maximize our success?

Social media is a “force multiplier” for the visibility of the IR communications and collateral you work so hard to create. Most of it has been disclosed on the wire or via Edgar and is available on your website or those of other organizations, making it easy to provide direct links. Thus, much of a basic program can merely involve providing links to IR collateral.

IR Social media content can include:

·      News releases, call transcripts & SEC filings

·      Presentation and conference call alerts

·      Presentations, webcasts & videos

·      Media coverage, interviews, blog posts & social media

·      Product brochures, photos & web pages

·      Research or other industry or governmental reports or white papers.

·      And a range of custom content we’ll save for another article.

Unlike financial portals where content is .... hidden ... based on stock symbols, social media is an unstructured fire hose of information... rationalized by key words...

Links to this content on their own, however, have little visibility or value (though we see them all the time) without a clear introduction. Unlike financial portals where content is safely ordered (and hidden) based on stock symbols, social media is an unstructured fire hose of information. That data glut is rationalized by key words or “hash tags” and stock symbols. In addition, “Follower” and “Followed” functions allow users to filter the torrent down to subjects of interest.

Each post must make clear what content is being referenced and why it is worth viewing. Assume it is the reader’s first interaction with your Company. Keys to successful posts include:

1)    Write clearly and succinctly, to be understandable to anyone. It takes time to winnow a message into 140 characters. Abbreviations and informal style make this possible.

2)    Use appropriate stock symbol nomenclature (generally a $ before the symbol as in $GOOG) so that all your posts are referenced to your symbol. Credible use of other relevant stock symbols will also aid your post’s discovery.

3)    Use “hash tags” as they are known on Twitter to reference your post to topics of interest searched by investors, such as #healthcare, #energy, #Japan, #timber & #retail. Use the most popular hash tags but also experiment to reach a different audience. Hash tags position you for discovery by those who DO NOT know your company or stock symbol. This is our primary reason for IR social media engagement.

4)    Link your accounts so that a post to one will automatically syndicate to others. But read the fine print to optimize your visibility by originating posts on certain sites and syndicating them to others. Be careful, some sites let you delete posts; others do not.

5)    Twitter averages 500M tweets per day across all topics, so even after a few days, a search might not yield your post. To unbury your post, delete and repost it (our recommendation), alter or add a photo or video and repost, Retweet, comment or favorite it.  

     Below are examples of social media posts on StockTwits. The top set of posts shows normal text posts and the following three examples show how the posts cut through the clutter better with the use of a graphic (photo, chart, etc.).

Showing our client's lithium replacement

 battery aboard an electric fork lift.

Showing our client's diagnostic device in action.

Highlighting our client's CEO and his Twitter page. 

We hope these comments have taken some of the mystery out of social media for IR - and how it can be easily implemented - and provided some valid reasons to reconsider your reluctance to enter the fray. We look forward to your comments and questions.

David C. Collins

Managing Director

Catalyst Global LLC – Capital Markets Counsel

January 13, 2014