Capital Markets

Sell-Side Analysts Dropping Small-Caps

In a mass exodus to larger companies, sell-side analysts are departing midsized and smaller corporations. Telecoms are also suffering abandonment.
Marie LeoneApril 28, 2004

Analysts are scattering from smaller companies in droves, according to new data released by Reuters Research. Of more than 2,400 small-cap and mid-cap publicly listed U.S. companies in the firm’s database, 53 percent lost coverage over the last two years. Only 29 percent gained coverage, and 18 percent remained the same.

By contrast, 31 percent of the large-cap companies lost coverage, 56 percent gained, and 13 percent recorded no change.

Over all, 671 public companies have been abandoned completely by sell-side analysts so far this year. Interestingly, all of the companies were covered by at least one analyst in 2002, according to the Reuters data.

Virtually all of the new “orphans” are small- or mid-cap companies. The exceptions include Telus Corp., Canada’s No. 2 phone company, which has $5.6 billion in market capitalization; Dreyer’s Grand Ice Cream Holdings, a $7.4 billion company; and LVMH Moet Hennessy Louis Vuitton SA, a purveyor of luxury goods with a $34 billion market cap.

Allegiance Telecom, a bankrupt local-exchange carrier that soon may be acquired by XO Communications, suffered the biggest swing in coverage: from 24 analysts to none in two years. Telus and another telecom, McLeodUSA, each recorded the second-biggest drop — from 16 analysts to zero since January 2002.

The Reuters Research figures were culled from a database of more than 4,000 publicly traded companies and released to CFO.com yesterday. The numbers suggest that many small companies are hanging on to their analyst coverage by a thread. For example, 488 companies are down to a single analyst, and 86 percent of those companies have a market capitalization of under $1 billion.

That’s not to say those single-analyst companies won’t stage a comeback; others have. Since January 2002, systems and security vendor Kroll Inc. jumped from 1 analyst to 12. NetScreen Technologies is now under the watchful eye of 23 analysts — up from 1 — in the wake of merger talks with Juniper Networks.

What company in the Reuters sample attracts the most coverage today? Cisco Systems, with 41 analysts keeping tabs on the communications equipment giant. That’s up from 36 two years earlier. Some 40 analysts watch Cognos, while 39 follow Verizon Communications and Apache Corp.

Not every big company has been able to maintain all its coverage, however. Four of the five largest companies (by market cap) — General Electric, Exxon-Mobil, Pfizer, and Citigroup — lost a few analysts during the past two years, but all four still have at least 15 analysts keeping watch. Out of the top five, only Microsoft, which picked up 3 analysts to bring its total to 33, gained coverage.

Some feel that departures of analysts might indicate that there’s a glut. “There’s too much capacity in the market when 20 to 30 analysts are covering a stock,” asserts Steve Weinstein, vice president and senior research analyst with Pacific Crest, an investment bank. “Does every report really add value [for investors]?”

Nevertheless, many analysts are still gainfully employed. As of this month, the total number of analyst recommendations has decreased by only 254 since January 2002 — a mere 1 percent dip.