New York, NY – Last week, Integrity Research Associates had the opportunity to participate in the National Investor Relations Institute’s (NIRI) 2011 annual conference held in Orlando, FL. While you would not typically expect to learn much about the research business at a conference full of investor relations professionals, it was clear that IR was certainly interested in learning more about how the changing landscape in the research industry might impact how they do their jobs.
Equity Research Redux – The Players, Scandals and Practice of IR
There has been an explosion in the number and types of equity research providers over the last few years. Today, there’s a dizzying array of choices, of which expert networks, channel checkers, and innovative sell-side firms are just a few. Institutional investors are utilizing these non-traditional sources of information, making it essential that IROs get familiar with the new research landscape.
One of the sessions at this year’s NIRI conference discussed these trends. In this session, participants heard directly from an IRO who has implemented an offensive strategy as well as the founder of a firm that advises institutions on which research providers to choose. The panelists for this session included the moderator, Steven Eschbach, Vice President, Investor Relations Integrys Energy Group, Inc., Heather Anthony, Vice President, Investor Relations IMAX, and Mike Mayhew, Founder & Global Director of Research at Integrity Research Associates, LLC.
Research Diversity is the New Normal
Traditionally, IROs focused a great deal of their time on telling the company’s story to potential investors. This included getting and keeping sell-side research coverage for their companies, as well as getting their management teams out on the road to speak directly to current and potential investors. Again, this required working with sell-side firms to schedule non-deal roadshows with their buy-side clients.
However, Mike Mayhew of Integrity Research made a short presentation discussing the proliferation and diversity of research produced by alternative research providers – including fundamental, economic, primary, quantitative, technical, and specialized research providers. In fact, Integrity presented charts and tables which showed that over the past 5 years, more than 80 new alternative research providers have started per year bringing the total number of alternative research firms to over 1,250 firms globally.
One of the major topics of discussion during the panel was the recent trend of II ranked analysts leaving large Wall Street investment banks to establish their own fundamental research boutiques. The IROs were a little confused by this trend. However, Mr. Mayhew explained that a growing acceptance of alternative research by the buy-side in recent years had cleared the way for well-known analysts to set up financially lucrative research firms where they could focus on producing research, deal with less bureaucracy, and serve a smaller more focused set of customers.
Most IROs explained that they continued to focus their attention on the traditional sell-side firms, and they did not know about most of these new alternative research boutiques. In fact, one of the panelists asked the group if they were working with the alternative research firms to provide them with access to their management teams. Most IROs said they did not, though a few noted that they had worked with former sell-side analysts like Dana Telsey who had since started their own research boutiques.
IMAX: A Case Study in Why Alternative Research Matters
One of the most compelling discussions during this panel came from Heather Anthony, the VP of Investor Relations with IMAX. Last minute, a business crisis forced Ms. Anthony to miss the NIRI conference, though she participated in the panel discussion via audio link.
The reason Ms. Anthony missed the conference was because less than a week earlier, a negative report on IMAX was published on Seeking Alpha – a report which prompted a 20% selloff in the companies’ share price. Consequently, Ms. Anthony was working with her management team to develop a strategy to deal with this negative report. Unfortunately, unlike traditional sell-side coverage, Ms. Anthony and her team did not have a relationship with the analyst who wrote the article, and therefore could not really understand the reason for their negative report, nor could they try to clarify the analysts’ concerns.
While the team at IMAX considered ignoring the Seeking Alpha story, ultimately they decided that they needed to address the concerns highlighted in the piece. Consequently, Ms. Anthony and her team contacted an analyst at Motley Fool who had written on IMAX most frequently to see if he wanted to interview IMAX’s CEO and write a report on the interview. The analyst agreed, and the article was published within 24 hours of being contacted.
The attendees of the panel were shocked that a relatively unknown source like Seeking Alpha could have such a significant impact on the price of IMAX’s stock. They also openly wondered whether the author was “talking his book” and merely trying to convince other investors to sell the shares after putting on a short. Despite this, the IMAX story raised significant concerns from most IROs if there were other alternative research providers, blogs, or social media sites they needed to be paying attention to in order to better manage their company’s story.
Lessons Learned from the Recent Insider Trading Scandals
Another topic discussed in this session was the recent insider trading investigations. As part of this discussion, Mr. Mayhew asked the IROs if they had corporate policies in place to prohibit their employees from speaking with investors via expert networks, or to ban them from taking part in surveys or “channel checks”. Surprisingly, only 1/3rd of the audience admitted having any such prohibitions in place.
When asked why the other 2/3rds did not have these types of policies, despite the slew of cases where corporate insiders were being accused of passing on insider information, the typical answer was they felt their existing policies or employee training was sufficient. In fact, one IRO said that all their employees knew that only 4 C-level executives were authorized to speak with current or potential investors.
As a follow up, Mr. Mayhew asked if any firms had been asked by expert networks or channel check firms (or had reached out to these research providers proactively) to let them know what their policies were on these topics? None of the IROs admitted to being contacted or to reaching out to expert networks or channel check providers. It was clear from this rather unscientific sample, that corporations had not really changing their behavior as a result of the insider trading scandals.
Summary
It was clear from the discussion at the Equity Research Redux panel at this year’s annual NIRI conference, most IROs were not terribly informed about the changes taking place in the alternative research industry. While most admitted that sell-side coverage was getting harder to come by if you were a mid-cap, small-cap, or micro-cap company, they acknowledged that they were not terribly aware of the alternative research firms that covered their companies. However, they admitted that developments like the IMAX / Seeking Alpha situation, or the insider trading scandals made it important that they pay more attention to the trends in the alternative research industry.