Capital Markets

Where’s the Coverage?

Fewer companies are being covered by analysts today than at any time since 1995.
Kris FrieswickJanuary 20, 2005

If you thought equity analysts weren’t paying enough attention to your company during the gold-rush days of the late 1990s, we’ve got bad news. Although the number of equity analysts in the United States has climbed 7.5 percent since 2003 — up to 3,207 from 2,983 a year earlier — that number is still 9.5 percent lower than it was during 2000, according to data released by StarMine, an analyst-research firm based in San Francisco.

This means that there are fewer companies being covered by analysts today (4,508) than at any time since 1995. To add insult to injury, the analysts left standing are also covering more tickers per person, 8.6. Last year was the second consecutive one in which that figure went up, rebounding from a six-year decline that started in 1996 (when it hit 11 tickers per analyst). This data shows that for small- and midcap public companies that are already grappling for coverage, things will undoubtedly get worse before they get better. And for those receiving coverage, quality will probably not rise as analysts struggle with an increasing coverage universe.

The problem, says StarMine vice president David Lichtblau, is that many of the new analyst positions are with smaller and boutique research firms, not the larger investment-bank research houses, where a deeper bench and more experience often compensate for higher workloads. That fact alone may signal a potential drop in the overall quality of equity analysis.

“As the number of companies an individual covers increases, something has to give,” says Rich Wyler, head of global public relations at the CFA Institute, an association for investment professionals. “The depth of the research decreases, the frequency of updates decreases, the quality decreases, or some combination of those. Every human has their limits.”

Many research analysts have apparently reached theirs: a CFA Institute study recently revealed that 40 percent of equity analysts polled expressed dissatisfaction with the number of hours they work, although 79 percent expressed satisfaction with the work itself.

Things are far worse overseas, however, as investment banks take a hatchet to their research divisions. The number of analysts in developed European countries, for instance, has dropped 13.3 percent since 2003, says StarMine.